THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


Thi     .ook       DUE  on  the  last 
date  s   imped  below 


. 


ORGANIZING  A  BUSINESS 


MAURICE  H.  ROBINSON,  Ph.  D. 

Protestor  of  Industry  and  Transportation,  University  of  Illinois;  Former  Special 

Agent  of  the  Census  Bureau.  Author  of  A  History  of 

Taxation  in  New  Hampshire,  etc. 


La  Salle  Extension  University 

•     Chicago 
1918 


Copyright,  1915 
DaSalle  Extension  University 


■  /If 


CONTENTS 


I.    Business  Organization 

The  Nature  of  Organization 1 

The  Relation  of  Organization  to  Management.  . .  3 

Factors  of  Wealth  Production 4 

Business  Units   8 

Methods  of  Conducting  Business 11 

Industrial  Groups  17 

Political  Conditions  and  Business  Organization.  20 
Social     and     Industrial     Conditions     Affecting 

Business    23 

Classes  of  Organizations   28 

II.     Individual  Proprietorship 

Advantages    29 

Disadvantages    31 

Industries  to  Which  Suited 32 

III.     The  Partnership 

The  Nature  of  a  Partnership 31 

General  and  Special  Partnerships 35 

Ordinary  and  Limited  Partnerships 36 

The  Articles  of  Co-partnership 36 

Dissolution  of  Partnerships 41 

Conditions  of  Success 42 

Joint  Stock  Companies 44 

Mining  Partnerships  45 

IV.    The  Corporation 

A  Legal  Entity   47 

A  Creature  of  the  State 48 

Limited   Liability    50 

Continued  Existence 52 

Transferable  Shares  54 

Centralized  Control 55 

iii 


iv  Contents 

Classes  of  Corporations 57 

Advantages  of  Corporations 62 

Disadvantages  of   Corporations 63 

V.     The  Formation  of  the  Corporation 

Promotion   68 

Financing  the  Enterprise 69 

The  Choice  of  a  State 70 

The  Process  of  Formation 73 

The  Capitalization   75 

Bonds 76 

Stock    77 

Registrars  and  Transfer  Agents 86 

The  Books  of  a  Corporation 87 

The  Corporation  Calendar 91 

VI.     The  Charter 

Its  Main  Features 94 

VII.    The  By-Laws 

Their  Essential  Features 101 

Resolutions    Ill 

VIII.     R-ights  and  Obligations  op  Bondholders, 
Stockholders,  and  Creditors 

Rights  of  Bondholders 113 

Rights  of  Stockholders  as  a  Body 116 

Rights  of  Stockholders  as  Individuals 118 

Liabilities  of  Stockholders 130 

Rights  of  Creditors 136 

IX.    Officers  and  Directors  of  a  Corporation 

The  Directors  138 

The  Corporate  Officers 148 

X.     Organization  for  Operation 

The  Proprietorship  and  the   Operating  Organ- 
ization     151 

General  Principles  of  Organization 151 

The  Executive 152 

Functional  Organization    161 

XI.    Business  Combinations  and  Trusts 

Reasons  for  Combinations 165 


Contents  v 

The  Association  166 

The  Combination  173 

Trusts   178 

The  Holding  Corporation 180 

The  Leasing  Company 183 

The  Community  of  Interests 184 

The  Merger 184 

XII.     Comparative  Efficiency  of  the  Various  Types 
of  Business  Organization 

Importance  of  the  Type 186 

Tests  of  Efficient  Organization 187 

Interplay  of  Principles  of  Organization 203 

XIII.    Leading  Forms  Used  in  Corporate  Management 

Articles  of  Co-partnership 207 

Notice  of  Dissolution  of  Partnership 208 

Notice  of  a  Partner 's  "Withdrawal 209 

General  Contract  to  Form  a  Corporation .209 

Promoter's  Contract 211 

Underwriting  Agreement 213 

Certificate  of  Incorporation 215 

Charter  of  the  United  States  Steel  Corporation.  .217 

Object  Clauses   228 

By-Laws  of  the  United  States  Steel  Corporation .  230 

Simple  Subscription  List 245 

Subscription  Blank  for  Use  After  Organization .  246 

Installment  Scrip 247 

Installment  Notice  for  Subscriptions  Payable  on 

Demand 247 

First  Meeting  of  Stockholders 248 

President's  Call  for  Special  Meeting  of  Stock- 
holders   249 

Notice  of  Annual  Meetings 250 

Secretary 's  List  of  Stockholders 250 

Ballot  for  Stockholders'  Meeting 251 

Oath  of  Inspectors  of  Election 251 

Inspectors'  Certificate  of  Election 252 

Notice  of  Election  as  Director 253 

A  Resignation    253 

Proxy  253 

Dividend  Notice 254 

Certificate  of  Preferred  Stock 255 

Certificate  of  Common  Stock 256 


vi  Contents 

Stock  Certificate  Stub 257 

Form  for  Assignment  of  Stock 258 

Resolution  Declaring  a  Dividend 258 

Certification  of  Resolution 259 

Reorganization  Certificate   259 

Certificate  of  Dissolution 261 


ORGANIZING  A  BUSINESS 

CHAPTER  I 
business  organization 

The  Natuke  of  Organization 

Organization  consists  in  arranging  parts  each  having 
special  functions  to  discharge  so  that  their  orderly,  har- 
monious, and  efficient  direction  is  made  possible.  This 
term  is,  it  will  be  noticed,  a  very  broad  and  comprehen- 
sive one.  It  applies  with  equal  facility  to  the  organic  life 
of  animals,  of  individuals,  and  of  groups  of  individuals. 

Thus  the  race  horse  is  a  highly  organized  combination 
of  chemical  constituents  whose  general  purpose  is  to 
secure  both  grace  and  speed.  Similarly  each  individual 
man  is  an  organized  entity  endowed  with  grace,  action, 
and  energy,  and  having  in  addition  the  ability  to  imagine, 
to  remember,  to  construct,  and  to  direct.  A  coach  and 
four,  filled  with  a  number  of  passengers  acting  under  the 
impulse  of  a  common  idea,  and  guided  by  the  accurate 
eye  and  the  steady  hand  of  the  driver,  is  an  organization 
of  a  complex  type.  A  club  of  men  united  by  common 
social  bonds  and  under  the  management  of  its  officers  is 
a  more  complex  organization  operating  for  social  pur- 
••  poses. 

The   city   is    a   more    or   less    completely   organized 

'.'.political  unit  which  fulfills  its  functions  well  only  when 

its  organization  is  harmoniously  developed.    The  nation 

is  a  still  more  complex  type  of  political  organization. 

1 


2  Organizing  a  Business 

The  British  Empire,  for  example,  with  its  centralized 
government  at  home  and  its  dependencies  of  various 
kinds  and  sizes  beyond  the  seas,  represents  the  most 
complex  type  of  political  organization  that  has  been 
developed  in  the  world's  history. 

The  bank,  the  factory,  the  wholesale  house,  the  retail 
store — each  is  a  business  organization  of  a  simple  type. 
The  clearing  house,  the  board  of  trade,  the  national 
manufacturers'  associations,  the  railway  freight  asso- 
ciations, the  commercial  combination,  the  trust,  the  hold- 
ing corporation —  all  are  business  organizations  of  a 
more  complex  character. 

All  organizations  are  formed  and  conducted  for  the 
good  of  the  various  constituent  members.  In  the  case 
of  a  business  organization  the  object  is  the  creation  of 
wealth  for  the  common  good,  which  is  afterwards  dis- 
tributed among  the  several  members  of  the  organization. 
If  more  wealth  can  be  created  by  an  organization  than 
can  be  created  by  the  members  working  individually, 
the  organization  fulfills  a  worthy  economic  purpose. 
Whether  the  wealth  thus  created  is  distributed  fairly 
among  the  members  depends  largely  upon  the  character 
of  the  organization  and  the  facility  with  which  the  sev- 
eral types  of  organizations  can  be  formed. 

It  is  thus  of  the  utmost  importance  to  the  social  wel- 
fare of  individuals  that  the  governments  under  whose 
authority  business  organizations  are  formed  place  no 
unnecessary  barriers  in  the  path  of  those  who  are  instru- 
mental in  determining  the  form  which  the  industrial 
organization  assumes.  The  evolutionary  forces  working 
with  peculiar  force  and  efficiency  in  the  business  world 
will,  in  an  upright  and  intelligent  business  constituency, 
insure  the  dominance  and  perpetuity  of  the  most  efficient 
and  the  most  equitable  types  of  business  organizations. 


Business  Organization  3 

The  Relation  of  Organization  to  Management 

Management  may  be  defined  in  a  general  way  as  "the 
art  of  conducting  an  organized  body  with  a  given 
purpose  in  view  for  the  sake  of  accomplishing  some 
predetermined  end."  Business  management  is  therefore 
the  art  of  directing  a  business  organization  to  secure 
definite  business  results.  Organization  is  preliminary 
to  management;  it  is,  however,  a  necessary  stage  in 
business  development.  Moreover,  efficient  management 
is  largely  contingent  upon  the  character  of  the  organiza- 
tion. For  example,  using  an  illustration  from  the  first 
paragraph  of  this  chapter,  the  horses,  the  coach,  and 
the  passengers  must  be  in  harmonious  relations  to  each 
other  to  permit  efficient  management.  A  large  coach, 
many  passengers,  and  a  pair  of  ponies  would  effectively 
prevent  good  management.  On  the  other  hand,  many 
horses,  a  small  coach,  and  many  passengers  would  be 
equally  unmanageable. 

So  in  the  business  world  the  organization  should  be 
adapted  to  the  work  to  be  performed,  and  all  parts  of 
the  organization  should  be  in  harmonious  relationship. 
Such  a  condition,  while  favorable  to  good  and  wise  man- 
agement, does  not  always  insure  such  a  desirable  end. 
The  latter  comes  only  as  a  result  of  knowledge  of  the 
organization  and  the  object  sought,  together  with  expe- 
rience in  this  portion  of  the  field  of  business  enterprise. 

Management  is,  therefore,  first  a  question  of  organiza- 
tion, and  then  of  the  skill  and  ability  of  the  manager. 
The  more  complex  the  organization,  the  more  difficult 
the  task  of  the  manager  becomes.  On  the  other  hand, 
organizations  ought  to  be  as  complex  as  the  nature  of 
the  work  undertaken  demands.  It  is  always  unwise  to 
attempt  to  make  business  problems  less  difficult  by  sim- 


4  Organizing  a  Business 

plifying  the  organization  when  the  nature  of  the  work 
undertaken  is  complex  in  itself.  It  is  far  better  to  find 
an  able  board  of  managers,  one  that  understands  the 
principles  involved  and  is  able  to  make  broad  and  com- 
prehensive plans. 

To  secure  good  and  efficient  management  is  at  once  a 
most  difficult  and  a  most  desirable  task  in  our  business 
activity.  Given  an  opportunity,  that  is,  conditions  where 
new  wealth  may  be  created  by  business  activity,  poor 
management  is  almost  sure  to  result  in  business  disaster, 
while  good  management  is  almost  equally  sure  to  result 
in  business  success. 

Factors  of  Wealth  Production 

In  the  organization  and  operation  of  every  business 
enterprise  the  co-operation  of  four  separate  and  different 
kinds  of  economic  elements,  commonly  called  the  factors 
of  production,  are  necessary.  These  four  factors  are 
(1)  land,  (2)  labor,  (3)  capital,  and  (4)  the  enterpriser. 
The  first  and  third  are  non-human  and  ordinarily  are 
unable  to  produce  articles  of  wealth  except  with  the  aid 
of  and  under  the  direction  of  business  enterprise.  The 
second  and  fourth  constitute  the  human  element  but  are 
separated  into  two  classes,  the  former  supplying  the 
labor  force  and  the  latter  directing  the  conduct  of  busi- 
ness enterprise.  As  each  of  these  factors  is  necessary 
in  business  activity,  it  is  desirable  to  explain  the  nature 
of  each  and  the  special  function  it  performs  in  business 
affairs. 

LAND 

Land  includes  not  merely  the  surface  of  the  earth, 
together  with  the  oceans,  lakes,  and  rivers,  but  all  the 
materials  below  the  surface  of  the  land  and  under  the 
seas.    It  also  includes  the  forces  of  nature,  the  work  of 


Business  Organization  5 

rivers,  wind,  and  tides,  the  effect  of  climatic  conditions, 
rainfall,  heat  and  cold,  winds  and  storms — in  fact,  all  of 
the  things  which  nature  has  furnished  for  mankind  to 
work  with. 

The  elements  furnished  by  nature  are  in  a  way  inde- 
structible; in  the  work  of  producing  wealth,  however, 
while  the  elements  are  not  destroyed,  they  are  changed 
in  form  in  such  a  way  that  in  many  cases  they  do  not 
become  usable  a  second  time.  Consequently  such 
resources  become  more  or  less  rapidly  exhausted  in  the 
process  of  wealth  production,  and  in  order  to  secure  the 
greatest  possible  benefits  it  is  necessary  to  conserve  such 
resources  with  the  greatest  possible  care.  Moreover  it  is 
also  desirable  to  use  the  land  and  the  natural  resources 
for  the  purposes  to  which  they  are  best  adapted.  It 
would  be  undesirable,  for  instance,  to  use  land  adapted 
to  the  cultivation  of  corn  for  the  production  of  fruits, 
or  land  peculiarly  fitted  for  manufacturing  purposes  for 
residences  and  recreation  grounds. 

Again,  certain  kinds  of  manufacturing  require  special 
climatic  conditions.  For  example,  the  manufacture  of 
cotton  goods  needs  a  moist  climate  while  the  manufacture 
of  flour  is  more  economically  conducted  in  a  dry  climate. 
Thus  the  adaptability  of  the  land  and  the  climatic  con- 
ditions to  particular  kinds  of  manufacturing,  of  farming, 
or  of  commerce  plays  an  important  part  in  connection 
with  the  production  of  wealth.  Further,  in  the  manu- 
facture of  goods  power  in  some  form  is  generally  found 
necessary;  hence  we  find  that  in  the  early  part  of  the 
last  century  manufacturing  establishments  were  located 
on  rivers,  at  points  where  water  power  could  be  utilized, 
and  that  in  more  recent  times  the  iron  and  steel  business 
is  located  at  points  in  close  proximity  to  deposits  of  coal 
and  natural  gas. 


6  Organizing  a  Business 

The  land  as  a  factor  of  production  thus  not  only 
furnishes  the  raw  materials  with  which  the  other  three 
factors  co-operate  in  furnishing  useful  goods,  but,  what 
is  of  large  importance  in  determining  the  character  of 
business  organizations,  the  location  of  those  materials, 
the  topography,  the  climate,  and  the  availability  of  nat- 
ural power,  such  as  rivers,  gas,  oil,  and  coal,  are  the 
determining  forces  in  the  location  of  trade  centers,  manu- 
facturing sites,  and  the  dwelling  places  of  mankind. 

It  has  been  found  that  temperature  also  is  an 
extremely  important  element  in  connection  with  the 
production  of  wealth.  The  temperate  climate  seems  to 
be  best  adapted  to  the  development  of  energy  and  enter- 
prise; consequently  those  countries  situated  within  the 
temperate  climate  have  generally  developed  more  rap- 
idly and  have  been  able  to  use  the  resources  of  nature 
with  greater  efficiency. 

LABOR 

A  second  element  in  production  is  man  himself.  It  is 
man's  labor  and  man's  productive  genius  that  have  made 
use  of  the  materials  furnished  by  nature  and  converted 
them  into  the  utilities  which  satisfy  his  wants.  Men 
differ,  however,  both  in  their  ability  to  deal  with  the 
materials  furnished  by  nature  and  in  the  use  which  they 
are  able  to  make  of  such  materials  when  converted  into 
suitable  form  for  human  use.  The  labor  power  of  any 
community  varies  in  accordance  with  the  knowledge  of 
the  individual  men  and  with  the  ability  of  the  individual 
men  in  their  associated  capacity  to  make  use  of  the  gifts 
of  nature.  The  primitive  races  are  largely  the  slaves  of 
nature  and  of  natural  forces.  As  a  result  of  the  growing 
intelligence  of  mankind  in  relation  to  business  enter- 
prise, greater  and  greater  control  over  nature  and  nat- 


Business  Organization  7 

ural  forees  is  attained.  From  the  economic  standpoint, 
the  progress  of  civilization  has  been  aptly  described  as 
a  process  by  which  man  has  been  transformed  from  the 
servant  of  nature  to  the  master  of  natural  forces.  This 
result  is  attained  partly  through  his  ability  to  create 
wealth  faster  than  he  consumes  it,  thus  enabling  him  to 
use  the  portion  that  he  has  saved  to  assist  him  in  the 
creation  of  additional  wealth.  Natural  resources  thus 
transformed  and  stored  by  man  are  called  "capital." 

CAPITAL. 

The  formation  of  capital  is  thus  one  of  the  funda- 
mental conditions  of  economic  progress.  In  the  first 
stages  of  civilization,  progress  consisted  chiefly  in  the  in- 
vention and  use  of  tools  and  weapons  of  defense.  The 
tools  were  used  to  assist  man  in  the  subjugation  of  nature 
and  the  weapons  were  used  to  protect  himself  against 
the  constant  warfare  to  which  he  was  subjected  by  hos- 
tile races  and  against  the  dangerous  animals  and  reptiles. 
The  tools  gradually  assumed  more  and  more  usable 
forms  and  with  each  stage  in  the  evolution,  he  became 
better  able  to  create  and  save  additional  capital  to  assist 
his  efforts  in  providing  for  his  increasing  wants  and 
adding  to  his  stock  of  capital.  He  was  thus  enabled  to 
provide  himself  with  shelter  and  with  clothing,  and  con- 
sequently he  became  better  able  to  withstand  the  hard- 
ships of  unfavorable  climatic  conditions  and  to  migrate 
from  the  warmer  climates  to  those  where  formerly  he 
was  unable  to  live  at  all. 

With  the  creation  of  a  stock  of  capital,  there  came  to 
be  a  marked  difference  between  those  races  which  were 
able  to  make  use  of  capital  in  connection  with  the  nat- 
ural resources  and  those  less  efficient  in  this  respect. 
Those  that  were  able  to  make  the  best  use  of  such  facili- 


8  Organizing  a  Business 

ties  became  masters  over  the  others  in  the  various  tribal 
warfares  that  occurred,  and  the  general  qualities  that 
had  enabled  such  races  to  make  and  save  capital  also 
enabled  them  to  preserve  their  supremacy  by  mak- 
ing use  of  the  conquered  races  for  various  purposes  con- 
nected with  their  economic  life. 

THE  ENTERPRISER 

It  is  the  function  of  the  enterpriser,  or  business  man- 
ager, to  direct  capital,  labor,  and  the  natural  resources 
into  their  proper  channels;  to  unite  the  three  in  proper 
proportions  to  secure  the  greatest  economic  results ;  and 
under  certain  methods  of  business  organization,  to 
assume  the  risks  connected  with  the  conduct  of  business 
establishments  and  to  take  the  profits  that  arise  as  the 
result  of  such  operations. 

Business  Units 

A  combination  of  land,  labor,  and  capital  organized 
into  a  working  union,  under  the  direction  of  a  man  or  a 
group  of  men,  for  the  purpose  of  creating  utilities,  that 
is,  to  add  to  the  store  of  useful  things,  constitutes  a  busi- 
ness unit.  Business  units  differ  in  size,  in  complexity, 
in  permanence,  and  in  the  character  of  the  work  which 
they  undertake.  For  example,  the  shoemaker's  shop  is  a 
business  unit.  It  occupies  and  uses  a  portion  of  the  land ; 
one  or  more  laborers  are  more  or  less  regularly  at  work ; 
and  it  uses  capital  in  the  form  of  a  building,  tools,  lasts, 
leather,  and  shoemaker's  findings.  Finally,  one  or  more 
men,  usually  one,  direct  the  activities  of  the  establish- 
ment for  the  purpose  of  making  and  repairing  boots  and 
shoes. 

The  grocery  store  is  an  example  of  a  business  unit 
of    a    somewhat    more    elaborate    type.      The    grocery 


Business  Organization  9 

store  uses  land,  capital,  and  labor  and  requires  manage- 
ment. The  capital  assumes  a  somewhat  different  form 
from  that  found  in  the  shoe  shop,  but  it  is  still  capital. 
It  is  made  up  of  a  stock  of  groceries,  continually  chang- 
ing in  kind  and  quantity,  a  store  building,  fixtures, 
horses,  and  delivery  wagons.  A  grocery  store  usually 
requires  the  work  of  more  laborers  than  a  shoe  shop  and 
labor  of  a  different  kind.  Some  labor,  however,  is  indis- 
pensable in  either  case.  Furthermore,  the  grocery  store, 
like  the  shoe  shop,  needs  intelligent  management.  This 
management  may  be  in  the  hands  of  one  man,  or  under 
two  or  more  men  working  together  as  one.  Without 
such  management  the  stock  of  goods  will  grow  stale,  the 
capital  will  be  destroyed,  and  the  labor  will  be  misdi- 
rected. 

The  United  States  Steel  Corporation  is  an  exam- 
ple of  a  business  unit  of  an  exceedingly  complex  char- 
acter. Unlike  the  shoe  shop  and  the  grocery  store,  the 
steel  corporation  is  itself  made  up  of  subordinate  or 
constituent  parts  which,  from  their  character,  we  may 
call  "operating  units."  These  operating  units  are 
united  into  a  single  business  unit  by  means  of  the  holding- 
corporation  method  of  uniting  economic  interests.  This 
will  be  more  fully  described  in  a  later  section.  These 
operating  units  are  each  composed  of  land,  capital,  and 
labor.  In  this  respect  they  are  identical  with  the  small 
business  units  already  described.  In  one  important  char- 
acteristic they  differ,  however,  and  that  is  in  respect  to 
the  management.  The  operating  units  of  which  the  steel 
corporation  is  composed  are  each  controlled  and  directed 
from  the  central  office ;  that  is,  they  are  not  self -directing, 
but  subject  to  the  orders  of  general  administrative  offi- 
cers of  the  steel  corporation. 


10  Organizing  a  Business 

Unity  of  management  is,  then,  a  peculiar  characteristic 
of  a  business  unit. 

Thus  a  business  unit  may  be  identical  with  an  operat- 
ing unit,  or  composed  of  several  such  organizations. 
Moreover,  when  business  units  are  made  up  of  several 
formerly  independent  business  units,  the  union  may  be 
either  partial  or  complete,  temporary  or  permanent. 
When  the  control  is  divided  between  the  subordinate 
units  and  the  central  organization,  the  union  is  a  partial 
one ;  the  rights  of  the  central  management  are  limited 
by  the  terms  of  the  union,  and  in  all  other  respects  the 
formerly  independent  business  unit  is  free  to  act  for 
itself. 

This  form  of  business  organization  may  be  likened  to 
the  federal  union  of  governments  similar  to  that  of  the 
United  States  and  the  several  states  of  which  the  central 
government  is  composed.  The  several  subordinate  oper- 
ating business  units  are  in  the  process  of  becoming 
completely  merged  with  the  central  organization,  and  if 
the  process  is  carried  to  its  logical  conclusion,  the  organi- 
zation, from  a  business  point  of  view,  will  in  the  course 
of  time  be  completely  unified.  Where  the  control  is 
entirely  in  the  hands  of  a  single  management,  the  union 
is  a  complete  one.  In  this  case  the  operating  units  have 
no  rights  of  their  own,  but  are  strictly  subject  to  orders 
from  the  central  administrative  offices.  Such  a  business 
organization  may  be  compared  to  a  completely  unified 
central  government  where  the  legal  political  organiza- 
tions, such  as  the  cities,  counties,  and  townships,  have  no 
rights  of  their  own,  but  are  entirely  subject  to  the  control 
of  the  state  legislature  and  the  state  administration. 

Where  a  business  unit  is  made  up  of  operating  units, 
the  union  may  be  formed  for  a  period  of  years  or  it  may 
be  a  permanent  organization.    In  cases  where  the  union 


Business  Organization  11 

is  not  complete,  it  is  quite  usual  for  a  temporary  union  to 
be  formed.  Such  unions  are  illustrated  by  the  combina- 
tions which  were  very  common  in  the  United  States  dur- 
ing the  seventies  and  early  eighties,  and  have  been  for 
the  last  quarter  of  a  century  a  characteristic  feature  of 
German  industrial  organization.  Where  the  union  is  at 
all  complete,  the  organization  is  more  likely  to  become 
a  permanent  one.  The  advantages  of  complete  and  per- 
manent organizations  are  so  great  that  the  tendency  is 
strongly  towards  this  type  of  business  organization.  A 
good  illustration  of  this  type  is  the  American  Sugar 
Refining  Company  as  organized  in  1894  after  the  dis- 
solution of  the  first  sugar  trust.  It  is  better  illustrated 
by  the  International  Harvester  Company,  which  is  made 
up  of  a  number  of  formerly  independent  factories,  all 
of  which  are  now  completely  unified,  from  the  standpoint 
of  business  organization  and  business  management,  into 
one  great  company. 

Methods  of  Conducting  Business 

Considered  from  the  standpoint  of  economic  reward, 
there  are  two  important  methods  of  conducting  business 
enterprises.  The  first  class  comprises  those  groups  in 
which  all  the  individuals  interested  in  the  business  enter- 
prise share  in  the  income.  The  second  class  consists  of 
those  groups  where  a  selected  few  control  the  operations ; 
they  pay  a  stipulated  amount  for  the  use  of  the  land, 
capital,  and  labor  employed ;  they  assume  all  or  the  major 
portion  of  the  risk  of  failure  and  receive  correspond- 
ingly all  or  a  major  portion  of  the  profits  arising  from 
the  operations. 

COMMUNISM 

The  most  comprehensive  type  of  organization  of  the 
first  class  is  the  communistic  society.    Under  this  form 


12  Organizing  a  Business 

of  organization  there  is  only  one  business  unit  for  the 
whole  economic  society.  In  its  ideal  form  this  society  is 
identical  in  its  organization  and  scope  of  activity  with 
the  political  organization  known  as  a  state.  Under  pres- 
ent conditions,  however,  the  communistic  societies  exist- 
ing today  are  small  organizations  forming  one  of  the 
many  business  units  of  which  the  state  is  composed. 

Communism  differs  from  other  types  of  economic 
society  in  two  important  respects:  (1)  The  land  and 
the  capital  belong  to  the  entire  community;  (2)  all  goods 
ready  for  consumption  are  held  in  the  name  of  the  com- 
munity and  distributed  by  the  central  management  to 
the  various  members  on  a  substantially  equal  basis.  The 
work  of  production,  moreover,  is  directly  under  the  con- 
trol of  the  same  all-powerful  board  of  directors,  subject 
only  to  the  duly  enacted  constitution  and  the  by-laws  of 
the  society.  The  directors  are  elected  by  popular  vote 
at  stated  intervals  and  possess  during  their  term  of  office 
the  entire  political  power  as  well  as  the  right  of  business 
management.  To  this  board  belongs  the  task  of  assign- 
ing to  each  member  of  the  organization  his  work  and  of 
supervising  its  execution. 

The  communistic  society,  therefore,  must  be  com- 
pletely and  harmoniously  organized,  as  well  as  skilfully 
managed,  or  the  individual  members  will  fail  to  perform 
the  various  tasks  efficiently  and  the  society  will  fail  for 
want  of  the  necessities  of  life.  Partly  owing  to  the  nat- 
ural selfishness  of  mankind  and  partly  to  the  difficulty 
of  organizing  and  managing  societies  of  so  complex  a 
character,  few  communistic  organizations  have  achieved 
success.  Unless  held  together  by  some  dominant  relig- 
ious motive,  they  usually  have  experienced  a  stormy  ex- 
istence and  a  short  life. 


Business  Organisation  13 

SOCIALISM 

A  more  promising  form  of  social  organization  is 
known  as  socialism,  or  the  socialistic  society.  Socialists 
differ  from  communists  in  several  important  respects. 
While  the  communists  make  all  property  common,  the 
socialists  not  only  permit  but  encourage  individual  own- 
ership of  goods  ready  for  consumption.  To  use  the 
words  of  Professor  Ely: 1 

Socialists  seek  the  establishment  of  industrial  democracy 
through  the  instrumentality  of  the  state.  Our  political  organiza- 
tion is  to  become  also  an  economic  industrial  organization.  Social- 
ism contemplates  an  expansion  of  the  business  functions  of  the 
Government  until  the  more  important  businesses  are  absorbed. 
Private  property  in  profit-producing  capital  and  rent-producing 
land  is  to  be  abolished.  Socialists  make  no  war  upon  capital; 
what  they  object  to  is  the  private  capitalist.  They  desire  to 
socialize  capital  and  to  abolish  capitalists  as  a  distinct  class. 
Their  ideal,  then,  is  not,  as  is  supposed  by  the  uninformed,  an 
equal  division  of  existing  wealth,  but  a  change  in  the  fundamental 
conditions  governing  the  acquisition  of  incomes. 

Socialistic  organization,  then,  expands  the  economic 
functions  of  the  state  so  far  as  seems  necessary  in  order 
to  abolish  private  property  in  land  and  the  tools  of  pro- 
duction. In  all  other  cases  the  individual  or  groups  of 
individuals  voluntarily  engage  in  the  usual  economic  ac- 
tivities. The  socialistic  organization  is  coincident  with 
that  of  the  state  so  far  as  its  functions  extend.  Like  the 
communistic  organization,  it  must  be  well  organized  and 
well  managed  or  disaster  and  failure  inevitably  follow. 

Side  by  side  with  the  socialistic  organization  and 
within  the  political  organization,  there  exist  voluntary 
organizations  of  individuals  for  the  purpose  of  under- 
taking economic  functions  not  under  the  control  of  the 

i  Outlines  of  Economics,  page  515. 


14  Organizing  a  Business 

socialistic  state.  Such  voluntary  organizations  work  for 
themselves  exactly  as  most  men  work  under  present  con- 
ditions. There  is,  therefore,  competition  existing  be- 
tween the  socialistic  state,  carrying  on  the  work  of  pro- 
duction, and  the  voluntary  organizations  of  individuals, 
undertaking  all  other  economic  activities.  Unless  the 
socialistic  state  is  able  to  work  with  as  great  efficiency 
as  those  engaged  in  private  enterprise,  socialism  proves 
a  failure  and  is  likely  to  be  abandoned  even  by  its  own 
adherents.  Like  communism,  the  economic  success  of  the 
socialistic  state  depends  more  upon  organization  and  ad- 
ministration and  less  upon  the  individual  ability  than 
the  present  methods  of  conducting  business  affairs. 

CO-OPERATION 

A  less  pronounced  type  of  social  organization,  and  one 
that  is  under  present  conditions  considered  even  more 
practical,  is  the  co-operative  society.  Such  organiza- 
tions depend  upon  the  voluntary  co-operation  of  the  par- 
ties and  therefore  must  be  successful  from  the  economic 
point  of  view  in  order  to  be  permanent.  Like  the  com- 
munistic and  socialistic  societies,  co-operative  organiza- 
tions are  managed  by  an  elected  board.  They  maintain, 
for  purposes  of  operation,  an  administrative  organiza- 
tion similar  to  that  which  exists  in  the  ordinary  business 
enterprise.  The  important  characteristic  of  this  form, 
and  one  that  distinguishes  it  from  the  usual  type  of  busi- 
ness organization,  is  this:  The  services  of  land,  capital, 
and  the  managers  are  paid  for  out  of  the  gross  income 
of  the  organization,  and  the  laborers  share  the  remaining 
profit  in  accordance  with  the  plan  arranged  by  the  consti- 
tution of  the  society. 

The  co-operative  enterprise  succeeds,  provided  (1)  that 
the  board  of  directors  is  sufficiently  far-sighted  to  employ 


Business  Organization  15 

able  administrators;  and  (2)  that  the  laborers,  being  in 
ultimate  control,  submit  to  discipline  and  work  as  effi- 
ciently under  their  own  organization  as  they  do  under  a 
capitalistic  organization  at  the  regular  wage  scale. 

Co-operative  societies  are  formed  to  engage  in  produc- 
tion and  to  assist  their  members  in  purchasing  goods  and 
services  for  their  individual  consumption.  The  first  class 
has  had  very  little  success,  although  there  are  a  few  not- 
able exceptions,  for  example,  the  Coopers'  Co-operative 
Societies  of  Minneapolis.  As  a  rule,  co-operation  in  pro- 
duction has  been  successful  only  when  the  work  is  sim- 
ple in  character  and  where  the  goods  manufactured  are 
easily  sold.  Co-operation  as  an  aid  in  purchasing  goods 
and  services  has  been  much  more  successful  from  the 
economic  standpoint,  and  therefore  such  organizations 
exist  in  considerable  numbers  in  many  different  coun- 
tries. This  results  partly  from  the  fact  that  the  profits 
can  be  more  fairly  distributed,  partly  because  the  risks 
are  less,  and  partly  because  the  problems  of  management 
are  less  difficult  to  solve.  Co-operation  of  this  kind  has 
been  peculiarly  successful  in  providing  life  insurance. 

THE    CAPITALISTIC    SYSTEM 

The  several  classes  of  business  enterprise  described 
above  stand  in  marked  contrast  with  the  second  type  of 
business  organizations.  Under  the  influence  of  competi- 
tion, a  managerial  class,  technically  known  as  "entrepre- 
neurs," has  been  developed,  whose  special  function  it  is 
to  organize  and  direct  business  units  and  to  take  the  prof- 
its arising  from  their  operation.  Under  normal  condi- 
tions, the  managers  own  a  part  of  the  land  and  capital 
and  employ  or  contract  for  the  use  of  such  additional 
land  and  capital  as  they  find  it  profitable  to  employ. 
They  further  contract  for  labor  of  the  proper  kind  and 


16  Organizing  a  Business 

quantity  to  operate  the  plant.  They  sell  the  entire  prod- 
uct on  the  open  market,  pay  all  the  expenses,  and  assume 
the  risks  in  connection  with  production,  due  either  to  mis- 
directed effort  or  to  destructive  forces  of  nature.  If  the 
character  and  location  of  the  business  are  well  chosen 
and  if  the  business  is  well  organized  and  ably  managed, 
the  profits  arising  from  such  favorable  conditions  are  the 
reward  of  successful  management  and  go  to  the  man- 
agerial class. 

Under  somewhat  extreme  conditions  of  individualism 
the  manager  is  a  single  person,  directing  the  establish- 
ment himself,  assuming  all  the  risks,  and  receiving  all 
the  profits.  This  was  the  usual  condition  of  industrial 
organization  in  the  early  stages  of  industrial  develop- 
ment, when  operations  were  simple  and  the  capital  re- 
quired was  small.  With  the  invention  of  machinery  and 
the  establishment  of  the  factory  system  on  a  large  scale, 
the  character  of  manufacturing  demanded  more  capital 
and  more  varied  talents  on  the  part  of  the  manager. 
Hence  followed  the  development  of  associations  of  in- 
dividuals for  the  purpose  of  conducting  and  controlling 
business  enterprises  and  the  division  of  labor  within  the 
managerial  group.  For  example,  in  a  partnership  manu- 
facturing business,  one  of  the  partners  may  act  as  treas- 
urer, supervising  the  accounts,  while  the  other  partner 
has  charge  of  the  factory  and  the  men  there  employed. 

In  larger  organizations  the  division  of  labor  and  of 
function  is  more  marked.  In  fact  only  a  few  of  the  men 
who  really  undertake  the  risk  of  the  enterprise  have  or- 
dinarily any  direct  control  over  the  financial  or  manu- 
facturing operations  of  the  company.  They  elect  a' board 
of  directors,  which  takes  direct  charge  of  the  manage- 
ment, rendering  an  account  of  its  work  at  the  annual 
meeting.     It  is  difficult,  not  to  say  impossible,  for  the 


Business  Organization  17 

average  stockholder  to  understand  the  accounts  or  to  de- 
termine from  them  whether  or  not  the  business  has  been 
honestly  and  efficiently  managed.  Furthermore,  the  di- 
rectors in  most  cases  employ  men  as  superintendents  and 
managers,  as  treasurers  and  accountants,  who  may  not 
be  members  of  the  company  at  all,  and  thus  the  direct  eco- 
nomic relationship  originally  existing  between  the  man- 
ager and  his  reward  is  partially  and  sometimes  com- 
pletely destroyed. 

Since  organizations  of  this  character  are  economically 
desirable  to  furnish  capital  to  undertake  the  operation  of 
the  more  important  enterprises,  all  citizens  are  more  or 
less  directly  interested  in  their  honest  and  efficient  admin- 
istration. Therefore  the  state,  representing  the  common 
good,  has  in  recent  years,  by  acts  of  the  legislature  and 
by  judicial  decisions,  regulated  to  a  considerable  extent 
the  internal  affairs  of  all  forms  of  voluntary  business  as- 
sociations which  operate  on  a  large  scale. 

Industrial  Geoups 

Business  organizations  need  to  be  adapted  to  the  na- 
ture of  the  work  which  they  are  to  undertake.  Work 
which  is  simple  in  its  nature,  requiring  small  plants  and 
few  men,  is  best  conducted  by  a  simple  organization. 
Work  of  a  more  complex  character,  demanding  large 
plants  and  a  large  labor  force,  needs  a  more  complex  or- 
ganization. Since  the  character  of  the  plant  is  largely 
conditioned  by  the  character  of  the  work  which  is  under- 
taken, it  is  desirable  to  classify  the  various  industries 
into  groups,  each  of  which  is  devoted  to  operations  sim- 
ilar in  character  and  requiring  similar  organizations. 
From  this  point  of  view  industries  may  be  classified  into 
extractive,  manufacturing,  commercial,  and  transporta- 
tion industries. 


18  Organizing  a  Business 

EXTRACTIVE    INDUSTRIES 

The  extractive  industries  include  farming,  fishing,  lum- 
bering, and  mining.  In  the  first  three  of  the  industries 
the  business  units  are  small  and  are  generally  best  ad- 
ministered by  the  individual  proprietor  or  a  partnership. 
In  the  case  of  mining,  however,  the  condition  is  somewhat 
different.  Mining  as  carried  on  at  the  present  time  re- 
quires a  large  investment  of  capital  and  elaborate  ma- 
chinery. Consequently  the  mining  industry  generally 
demands  a  business  organization  of  a  somewhat  elaborate 
order,  and  in  this  respect  differs  widely  from  the  other 
extractive  industries. 

MANUFACTURING 

Manufacturing,  as  the  word  signifies,  means  "made  by 
hand."  In  earlier  stages  practically  all  manufactured 
goods  were  thus  made.  Manufacturing  was  then  in  what 
is  known  as  the  handicraft  stage;  consequently  at  that 
time  it  was  operated  generally  by  small  and  simple  or- 
ganizations. Later  it  became  a  machine  industry,  de- 
manding a  large  investment  of  capital  in  tools  and  ma- 
chinery, and  the  organization  has  accordingly  been 
adapted  to  the  new  conditions. 

In  the  second  place,  goods  are  made  either  to  order  or 
for  the  general  market.  For  example,  men's  clothing  is 
made  either  in  the  small  shop  of  the  custom  tailor,  per- 
mitting of  a  simple  business  organization,  or  in  the  large 
factory,  catering  to  the  general  market,  in  which  case  the 
organization  becomes  sufficiently  complex  to  take  care  of 
the  varied  activities  of  this  method  of  manufacture. 

In  the  third  place,  manufacturing  plants  may  under- 
take only  one  stage  in  the  process  or  it  may  undertake  all 
of  the  stages-     For  example,  a  business  establishment 


Business  Organization  19 

may  manufacture  Bessemer  steel  billets  only  or  it  may 
mine  the  ore,  convert  the  ore  into  pig  iron,  and  then  into 
steel  billets,  then  into  beams,  and  finally  into  bridges. 
It  may  even  go  so  far  as  to  erect  the  bridges  ready  for 
traffic.  In  such  cases  the  organization  should  be  corre- 
spondingly complex  in  order  to  permit  of  efficient  direc- 
tion and  management. 

COMMERCE 

The  specific  work  of  commerce  consists  in  transferring 
titles  to  various  kinds  of  private  property.  Usually, 
however,  storage  of  goods  connected  with  the  trade  is 
conducted  in  connection  with  the  direct  work  of  com- 
merce. The  work  of  commerce  is  to  take  the  goods  from 
those  who  have  a  surplus  and  transfer  them  to  those 
who  have  a  deficiency.  Commerce  may  be  either  local, 
national,  or  international  in  scope.  Commerce  of  a  local 
nature  is  ordinarily  simple  in  character  and  needs  only 
simple  business  organization.  National  and  interna- 
tional commerce  are  more  complex  and  require  more  com- 
plex organizations. 

TRANSPORTATION 

Commerce  transfers  titles;  transportation  distributes 
the  goods.  Transportation  is  conducted  by  a  variety  of 
agencies  and  instrumentalities.  In  its  simplest  form  it 
is  conducted  by  pack  animals,  by  wagons  and  drays,  and 
by  boats  and  sailing  vessels;  in  its  more  complex  form, 
by  steam  cars,  by  steam  boats,  by  electric  traction,  by 
pneumatic  tubes,  and  by  pipe  lines  for  the  transporta- 
tion of  oil  and  other  fluid  products.  In  its  modern  devel- 
opment, transportation,  as  illustrated  by  the  modern  rail- 
way, is  the  most  complex  of  all  business  enterprises  and 
consequently  demands  the  most  comprehensive  and 
highly  developed  business  organization. 


20  Organizing  a  Business 

Political  Conditions  and  Business  Organization 

The  character  of  the  government  directly  affects  busi- 
ness organization  and  management  in  several  important 
particulars. 

In  the  first  place,  some  governments  undertake  many- 
kinds  of  business  enterprises,  and  all  governments  enter 
into  business  to  a  limited  extent.  For  example,  practically 
all  governments  collect,  transport,  and  deliver  mail. 
Many  governments  operate  telegraph  and  telephone  sys- 
tems, street  cars,  waterworks,  and  gas  plants,  and  fur- 
nish electricity  for  lighting  purposes.  A  few  govern- 
ments furnish  markets  and  undertake  the  business  of 
carrying  freight,  passengers,  and  express.  In  some  cases 
governments  prohibit  the  regular  business  organizations 
from  entering  into  the  business  industries  which  they 
operate.  In  other  cases  governments  compete  with  pri- 
vate organizations  doing  the  same  kind  of  business. 

In  the  second  place,  all  governments  authorize  particu- 
lar forms  of  organization  and  make  specific  regulations 
in  regard  to  their  operation,  and  protect  such  organiza- 
tions as  they  authorize  so  far  as  they  conform  to  the  law. 
Thus  the  partnership  and  the  corporation  are  universally 
authorized  by  every  modern  government.  Furthermore, 
merchants'  and  manufacturers'  associations,  stock  ex- 
changes, labor  unions,  and  other  organizations  formed 
for  the  purpose  of  facilitating  business  activity,  are  per- 
mitted and  protected  by  law.  In  cases  where  particular 
forms  of  business  organizations  are  definitely  authorized, 
the  authority  thus  conferred  is  always  strictly  limited  by 
the  terms  of  the  act.  In  other  cases,  where  business  or- 
ganizations are  voluntarily  formed  but  not  definitely  au- 
thorized by  a  particular  legislative  act,  the  authority  of 
such  organizations,  their  internal  relations,  and  the  scope 


Business  Organization  21 

of  their  activities  are  determined  in  each  case  by  the 
courts  as  the  case  seems  to  demand. 

In  the  third  place,  practically  all  modern  governments 
undertake,  through  legislation,  the  courts,  and  the  ad- 
ministration, to  protect  property  rights  of  all  business 
organizations  that  are  legitimately  formed.  In  this  coun- 
try the  federal  government  and  most  of  the  individual 
states  protect  such  property  rights  by  clauses  in  the 
fundamental  constitutions  as  well  as  in  the  statute  law. 
Moreover,  certain  organizations  are  permitted,  in  the  in- 
terests of  the  public  welfare,  to  take  private  property 
under  the  right  of  eminent  domain  for  their  own  use,  pay- 
ing the  owners  of  the  property  proper  compensation, 
whenever  in  the  judgment  of  the  courts  such  transfer  of 
property  rights  is  in  the  interests  of  the  public  service. 

In  the  fourth  place,  all  governments  protect  the  con- 
tracts which  are  entered  into  by  business  organizations. 
Whenever  agreements  between  such  organizations  are, 
for  any  reason,  not  enforced  through  some  responsible 
government,  they  are  almost  invariably  broken,  whenever 
it  is  for  the  individual  interest  of  either  party  to  do  so. 
Whenever  the  agreements  entered  into  by  business  or- 
ganizations are  deemed  contrary  to  public  policy,  the 
parties  to  such  agreements  are  subjected  to  either  civil 
or  criminal  penalties  or  to  both. 

In  the  fifth  place,  most  governments  regard  the  com- 
petitive system  as  fundamental  in  the  present  economic 
life  and  therefore  attempt  in  many  important  ways  to 
protect  and  perpetuate  it.  Any  organizations,  therefore, 
that  plainly  and  deliberately  attempt  monopolies  in  an 
industry  are  ordinarily  subjected  to  punishment,  and  in 
certain  cases  the  governments  take  extreme  measures  and 
order  their  dissolution.  This  policy  results  in  prevent- 
ing the  formation  of  certain  kinds  of  organizations  in 


22  Organizing  a  Business 

some  cases,  in  breaking  up  larger  organizations  into 
smaller  ones  in  other  cases,  and  in  still  others  in  entirely 
changing  the  form  of  organization  generally  adopted  for 
carrying  on  business  enterprises. 

An  excellent  example  of  this  is  found  in  the  attitude  of 
the  United  States  Government  and  the  German  Govern- 
ment toward  that  form  of  organization  known  as  the 
" combination "  in  this  country  and  the  "cartel"  in  Ger- 
many. In  the  United  States,  combinations  have  always 
been  held  void  and  in  most  cases  illegal.  In  Germany, 
on  the  other  hand,  such  organizations  have  been  ap- 
proved and  the  agreements  under  which  they  are  formed 
are  enforceable  at  law.  Consequently  our  American  in- 
dustrial leaders  early  abandoned  the  combination  and 
adopted  the  trust  form,  and  later  the  corporate  form,  of 
organization  in  its  place,  while  the  Germans  have,  under 
substantially  similar  industrial  conditions,  continued  to 
administer  the  common  relations  of  their  large  business 
enterprises  through  the  cartel  method. 

In  the  sixth  place,  in  some  cases  governments  go  so  far 
as  to  regulate  the  character  of  the  service  which  business 
organizations  formed  within  their  domains  render  to 
their  customers.  In  some  cases  this  regulation  is  in  the 
interest  of  those  who  purchase  the  goods;  in  others,  of 
those  who  are  engaged  in  the  service.  Examples  of  the 
first  method  are  found  in  the  pure  food  law  recently  en- 
acted by  the  United  States  Congress  and  in  laws  of  a  sim- 
ilar character,  enacted  in  several  of  the  states,  to  regulate 
the  quality  of  gas  and  water  furnished  by  private  organi- 
zations. Examples  of  the  second  method  are  found  in 
the  federal  legislation  requiring  all  interstate  railways 
to  equip  their  trains  with  safety  couplers  and  in  the  state 
laws  requiring  buildings  to  be  erected  in  conformity  to 


Business  Organization  23 

the  building  regulations  made  for  the  purpose  of  pre- 
venting conflagrations. 

In  the  seventh  place,  most  modern  governments  regu- 
late the  price  which  business  organizations  may  charge 
for  certain  kinds  of  industrial  service.  The  most  im- 
portant industry  in  which  this  policy  is  generally  fol- 
lowed is  that  of  transportation.  It  is  also  quite  generally 
applied  throughout  the  domain  known  as  the  "  public 
service  field."  Originally  it  was  thought  that  competition 
between  rival  railway  systems  would  insure  fair  and  sta- 
ble railway  rates.  As  a  result  of  experience,  it  has  been 
found  that  railway  competition  results  in  fluctuating 
rates  and  discrimination  between  places  and  individual 
organizations,  and  generally  in  the  final  consolidation  of 
the  competing  lines.  To  remedy  the  evils  growing  out  of 
such  conditions,  some  governments  have  purchased  and 
operate  the  entire  railway  systems  within  their  domains ; 
others  have  authorized  some  public  authority,  usually  a 
commission,  to  adjust  the  rates  for  the  purpose  of  secur- 
ing fairly  equitable  conditions  between  competing  rail- 
ways and  between  the  railways  and  those  who  make  use 
of  their  services.  The  character  of  the  policy  of  various 
governments  with  respect  to  business  organizations  thus 
plays  an  exceedingly  important  role  at  the  present  time 
and  one  of  growing  importance  as  the  complexity  of  in- 
dustrial conditions  increases. 

Social  and  Industrial  Conditions  Affecting  Business 

Not  less  important  than  the  political  conditions  are  the 
social  customs  and  moral  ideals  of  the  business  world. 
As  already  noticed,  in  organized  industry  each  individual 
receives  his  own  economic  reward  as  a  result  of  the  di- 
vision of  a  common  fund.  With  simple  organizations  it 
is  possible  for  the  parties  interested  to  take  part  directly 

3 


24  Organising  a  Business 

in  the  division  of  the  spoils.  In  most  cases,  however,  the 
share  of  each  participant  is  to  a  considerable  extent  de- 
pendent upon  the  good  faith  of  those  chosen  to  make  the 
distribution.  While  governments  may  punish  those  who 
act  fraudulently  and  may  attempt  in  all  possible  ways  to 
insure  an  equitable  allotment  of  the  common  store,  still, 
generally,  the  parties  to  a  comprehensive  business  organi- 
zation must  rely  on  the  good  faith  and  common  honesty  of 
those  whom  they  choose  to  manage  the  enterprise.  This 
is  the  reason  why  the  corporation  cannot  flourish  except 
in  communities  where  the  standard  of  business  morals  is 
fairly  high  and  why  profit-sharing  co-operative  organiza- 
tions have  usually  failed.  It  is  true,  of  course,  that  the 
introduction  of  accounting  systems  and  the  extension  of 
the  police  activity  of  the  state  may  make  possible  business 
organizations  of  considerable  complexity,  even  where  the 
morals  are  low.  Such  conditions,  however,  add  immensely 
to  the  cost  of  conducting  business  and  to  the  expenses  of 
the  government.  Ordinarily,  therefore,  the  simpler  types 
of  business  organizations  persist  until  the  moral  tone  of 
the  business  community  is  fairly  high. 

The  development  of  the  higher  types  of  business  or- 
ganization is  for  many  reasons  extremely  slow.  The  cor- 
poration, for  example,  existed  in  its  principal  features 
among  the  Romans,  two  thousand  years  ago,  but  yet  it  is 
only  within  the  last  twenty-five  years  that  this  form  of 
organization  has  become  a  dominant  factor  in  modern 
business  enterprise,  and  that  only  in  the  more  progressive 
countries.  In  this  respect  the  city  stands  in  marked  con- 
trast to  the  country.  This  is  because  it  is  customary  for 
the  city  dweller  to  associate  in  various  ways  with  his 
neighbors.  On  the  contrary,  the  countryman  is,  by  force 
of  circumstances,  in  the  habit  of  working  and  living  alone. 
To  be  sure,  he  undertakes  certain  co-operative  enterprises 


Business  Organization  25 

in  connection  with  his  neighbors,  but  in  his  ordinary  busi- 
ness relations  he  acts  purely  in  his  own  capacity  as  an 
individual.  For  this  reason  it  is  difficult  to  f  orm  corpora- 
tions for  the  purpose  of  carrying  on,  for  instance,  cream- 
eries among  the  dairy  farmers.  On  this  account  stock- 
brokers do  not  look  among  the  farmers  for  their  regular 
customers,  although  as  a  matter  of  fact  the  farmers  are 
becoming  an  important  class  of  investors.  With  their 
surplus  gains  they  buy  land  and  make  their  investments 
where  they  can  personally  overlook  the  property  which 
they  own  and  directly  superintend  its  management.  As- 
sociated business  enterprise  has  not  become  a  habit  or 
custom  with  them.  They  are  accustomed  to  associate 
for  political  purposes,  but  not  for  business  enterprise. 

The  development  of  the  co-operative  spirit  necessary  in 
the  modern  business  organization  and  management  is  the 
outgrowth  of  experience  and  is  founded  upon  mutual 
confidence  and  reciprocal  good  faith.  Since  the  earliest 
times,  men  have  been  accustomed  to  co-operate  for  the 
purpose  of  undertaking  physical  tasks  beyond  the 
strength  of  one  man.  For  example,  in  colonial  clays,  and 
even  within  the  memory  of  the  present  generation,  sub- 
stantial frame  houses  and  barns  were  erected  at  a  rais- 
ing, in  which  all  the  active  young  men  of  the  neighbor- 
hood joined.  Another  familiar  method  of  co-operating 
is  known  as  changing  work,  characteristic  of  New  Eng- 
land farm  life  in  earlier  days  and  still  common  in  every 
farming  community.  In  such  cases  the  relation  existing 
between  the  service  rendered  and  the  compensation  is 
easily  calculated  by  the  participants. 

With  the  complete  development  of  the  principle  of  spe- 
cialization of  work  and  of  the  economic  system  known  as 
"money  exchange,"  the  character  of  co-operation  has 
almost  entirely  changed.    Men  co-operate  at  the  present 


26  Organizing  a  Business 

time  chiefly  in  furnishing  capital  to  equip  and  operate 
factories,  stores,  and  railways.  Capitalists  and  laborers 
co-operate,  each  furnishing  the  necessary  element  in  the 
work  of  production  and  each  receiving  his  compensation 
out  of  the  common  product.  Under  these  circumstances, 
the  relation  between  the  work  done  and  its  just  reward, 
so  obvious  in  physical  co-operation,  is  always  difficult  and 
sometimes  impossible  to  ascertain.  Consequently  men 
hestitate  to  enter  into  organizations  of  this  character, 
preferring  to  work  alone  and  enjoy  all  the  fruits  of  their 
labor  even  though  such  fruits  may  be  less  abundant.  As 
men  become  more  honest  and  less  selfish,  the  co-operative 
spirit  develops.  As  men  become  more  and  more  proficient 
in  their  grasp  of  economic  principles,  they  are  able  to 
understand  the  part  played  by  each  factor  in  general 
production,  and  therefore  they  are  better  able  to  agree 
on  a  division  of  the  product  into  individual  shares. 

But  to  understand  the  problem  is  not  enough.  Some 
exact  method  of  applying  the  principles  must  be  used  to 
secure  results.  Such  a  method  is  furnished  by  modern 
accountancy.    Accounting  has  a  double  task  to  perform : 

(1)  to  secure  responsibility  and  attention  to  duty  and 

(2)  to  determine  the  part  played  in  joint  production  by 
the  several  elements  in  business  organization  and  conse- 
quently the  proper  share  of  each  in  the  common  product. 
The  co-operative  spirit,  so  necessary  in  the  complex  or- 
ganizations of  our  modern  business  life,  awaits  the  devel- 
opment of  a  higher  standard  of  business  morals  and  a 
more  perfect  understanding  of  economic  principles  and 
the  application  of  such  principles  through  the  science  and 
art  of  accounting. 

That  the  character  of  business  organization  is  pro- 
foundly affected  by  industrial  conditions  does  not  need  to 
be  proved.     In  the  handicraft  system  the  organization 


Business  Organization  27 

was  bound  to  be  simple ;  in  the  factory  system  tlie  organi- 
zation becomes  complex  as  the  factory  operations  become 
complex  and  intricate.  Thus,  the  inventions  of  the  spin- 
ning jenny,  of  the  power  loom,  of  the  steam  engine  and 
the  locomotive,  of  the  telegraph  and  the  telephone,  of 
Bessemer  steel  and  of  reinforced  concrete,  have  been, 
during  the  past  century,  dominant  forces,  causing  busi- 
ness organization  to  become  more  and  more  complex  and 
more  and  more  extensive. 

The  enlargement  of  modem  states  through  the  absorp- 
tion of  small  political  units,  the  extension  of  free  trade 
areas,  the  development  of  cheap  transportation  and  of 
the  world  market,  have  constantly  been  calling  for  a 
higher  organization  of  the  industrial  activities. 

Furthermore,  the  amount  of  capital  ready  for  invest- 
ment and  the  freedom  with  which  it  flows  into  the  hands 
of  business  managers,  play  an  important  part  in  shaping 
business  organization.  The  industrial  and  financial  con- 
ditions for  the  past  century  have  been  demanding  changes 
in  business  organization,  all  looking  toward  greater  com- 
plexity and  greater  size. 

On  the  other  hand,  the  unfavorable  political  conditions, 
the  low  standard  of  business  morals,  lack  of  a  knowledge 
of  economic  principles,  unscientific  accounting,  and  a 
scarcity  of  men  of  the  proper  caliber  to  undertake  the 
task  of  organization  and  management  for  large  and  com- 
plex business  undertakings — all  these  factors  have  pre- 
vented the  normal  development  of  business  organization 
corresponding  in  character  with  the  technical  develop- 
ment of  the  industrial  world.  Kapid  progress  has  been 
made  in  all  of  these  lines  in  the  past  century,  and  it  may 
be  confidently  expected  that  such  barriers  to  the  proper 
development  of  business  organization  will  be  of  less  im- 
portance in  the  future. 


28  Organizing  a  Business 

Classes  of  Oeganizations 
As  already  stated,  the  function  of  the  enterpriser,  or 
business  manager,  is  to  organize  the  factors  of  production 
into  a  working  union,  direct  their  activities,  assume  the 
risk  of  failure,  and  receive  the  rewards  of  business  suc- 
cess. Under  ordinary  conditions,  in  industrial  societies  as 
at  present  carried  on,  there  are  three  principal  types  of 
business  organizations,  each  having  peculiarities  of  its 
own,  each  being  fitted  for  certain  kinds  of  business  oper- 
ations, and  each  having  certain  limitations  which  prevent 
its  general  adoption.  These  three  kinds  of  business  or- 
ganizations are  the  individual  proprietorship,  the  part- 
nership, and  the  corporation. 

TEST  QUESTIONS 

1.  What  is  the  object  of  organization  in  modern  business  ? 

2.  What  is  the  relationship  between  business  organization  and 
business  management? 

3.  What  are  the  four  factors  of  wealth  production  ?  How  are 
they  combined  in  actual  business  operations? 

4.  What  is  the  importance  of  business  units  in  relation  to  this 
subject  of  business  organization  ? 

5.  What  are  the  essential  features  of  a  communistic  system  of 
organization  ?  of  socialism  ?  of  co-operation  ? 

6.  How  does  the  capitalistic  system  differ  from  all  the  fore- 
going systems  of  industrial  organization? 

7.  What  are  the  four  main  industrial  groups  in  modern  busi- 
ness organization?  How  do  the  problems  of  organization  differ 
in  each  ? 

8.  In  what  notable  way  does  the  policy  of  the  German  Govern- 
ment with  respect  to  business  organizations  differ  from  that  of 
the  United  States  Government? 

9.  What  is  meant  by  an  enterpriser  ?  Would  he  exist  under 
a  socialistic  system  of  industrial  organization? 

10.  Mention  the  three  chief  types  of  proprietorship  organiza- 
tion. 


CHAPTER  II 
individual  proprietorship 

Advantages 

The  individual  proprietorship  has  several  marked  ad- 
vantages which  make  it  a  prominent  type  of  business 
organization. 

In  the  first  place,  the  individual  proprietor  can  ordi- 
narily undertake  any  kind  of  business  enterprise  except 
those  which  are  assumed  by  the  government  exclusively, 
or  are  forbidden  on  grounds  of  public  policy,  or  require 
special  licenses.  An  individual  business  enterpriser  can- 
not, in  the  United  States,  undertake  the  transportation 
of  the  mail,  or  engage  in  coining  money,  or  at  the  present 
time  engage  in  the  lottery  business.  Nor  can  an  indi- 
vidual ordinarily  undertake  the  business  of  selling  alco- 
holic beverages  without  a  license  from  some  responsible 
government.  But  outside  of  those  business  activities 
which  are  assumed  by  the  government,  forbidden  en- 
tirely, or  permitted  by  license  only,  the  individual  pro- 
prietor is  free  to  enter  into  any  business  enterprise, 
conduct  it  as  long  as  he  pleases,  and  retire  from  it  when- 
ever, he  has  completed  all  the  contracts  into  which  he  has 
entered.  The  ability  of  the  individual  proprietor  to  enter 
into  business  undertakings  without  any  formality,  and  re- 
tire in  the  same  way,  is  an  important  factor  in  promoting 
business  enterprise  and  in  keeping  the  several  lines  of 
business  activity  evenly  developed. 

In  the  second  place,  the  individual  proprietor,  having 
no  one  else  to  consult,  can  act  in  emergencies  with  greater 

29 


30  Organizing  a  Business 

promptness  than  the  more  complex  forms  of  organiza- 
tion. He  may  take  advantage  of  business  opportunities 
that  are  impossible  in  the  case  of  partnerships  or  cor- 
porations. For  the  same  reason  he  may  also  avoid  cer- 
tain dangers  that  ordinarily  surround,  and  sometimes 
destroy,  business  enterprises.  Of  course  the  ability  to 
act  promptly  is  not  an  unmixed  business  blessing.  Hasty 
action  is  often  the  direct  cause  of  business  failure. 
Where  deliberation  and  the  combined  judgment  of  sev- 
eral men  are  desirable,  the  individual  proprietorship  has 
marked  disadvantages.  The  individual  proprietor,  then, 
having  the  power  to  act  on  his  own  responsibility,  must 
needs  be  a  man  of  sound  business  judgment  and  discre- 
tion in  order  to  maintain  his  business  existence  side  by 
side  with  organizations  which  are  able  to  use  the  business 
ability  of  several  men  in  determining  questions  of  busi- 
ness policy.  As  business  conditions  become  more  stable 
and  the  law  of  business  success  becomes  better  known,  the 
advantages  of  the  individual  proprietor  grow  less  and 
less. 

In  the  third  place,  the  individual  proprietor  can  keep 
his  own  affairs  to  himself.  While  the  element  of  secrecy 
is  of  less  and  less  importance  as  business  management 
becomes  more  of  a  science  and  less  of  an  art,  still  the 
more  competitors  know  of  one's  business  plans  and  proc- 
esses, the  less  the  chance  of  ultimate  success.  This  is 
the  inevitable  result  of  two  conditions,  both  of  which 
seem  to  be  permanent  factors  in  our  present-day 
economic  system.  They  are  (1)  competition  and  (2) 
ignorance. 

Competition  is  the  economic  struggle  of  similar  busi-| 
ness  units  for  supremacy;  hence  strategy,  maneuvering, 
and  sometimes  deceit,  play  an  important  part  in  business 
success.    Details  of  plans  must  be  kept  from  competitors, 


Individual  Proprietorship  31 

and  this  is  always  difficult  and  sometimes  impossible 
where  many  men  are  interested  in  the  business  manage- 
ment. Second,  it  is  only  by  keeping  one's  business  enemies 
in  ignorance  of  one's  plans,  methods,  and  processes  that 
one  is  able  to  keep  whatever  advantage  comes  from  ex- 
clusive knowledge.  As  secret  processes  become  known  to 
the  trade  and  as  business  success  becomes  more  and  more 
dependent  upon  efficiency  in  production,  the  advantages 
of  the  individual  proprietor  in  this  respect  become  of  less 
importance. 

In  the  fourth  place,  since  every  business  enterprise  has 
its  own  peculiar  risks  and  those  who  undertake  the  or- 
ganization and  management  reap  the  profits  from  their 
exclusive  operation,  it  follows  that  the  same  parties  ought 
to  suffer  the  natural  penalties  that  result  from  unsuccess- 
ful management.  In  the  individual  proprietorship  this 
is  ordinarily  the  case.  Those  individual  proprietors 
prosper  who  manage  their  business  enterprises  well; 
those  who  do  not,  soon  fail  and  take  their  proper  places 
as  superintendents  and  laborers.  The  law  of  the  survival 
of  the  fittest  is  applied  with  almost  relentless  certainty 
to  business  enterprises  operated  under  the  control  of  the 
individual  proprietor,  and  rapid  progress  in  the  science 
and  art  of  business  management  is  a  necessary  result. 

Disadvantages 

There  are,  however,  several  particulars  in  which  the 
individual  proprietor  fails  to  provide  successful  business 
organization  for  particular  kinds  of  businesses.  The 
more  important  of  these  disadvantages  may  be  enumer- 
ated and  placed  in  contrast  with  the  strong  points  of  this 
type  of  organization.  In  the  first  place,  owing  to  the  de- 
mand for  large  organizations  in  certain  industrial  groups. 


32  Organizing  a  Business 

the  capital  at  the  command  of  any  one  individual  is  often 
insufficient  for  the  construction  and  operation  of  a  plant 
of  the  greatest  economy ;  hence  individuals  combine  their 
capital.  In  the  second  place,  large  enterprises  often 
require  business  judgment,  skill,  and  ability  beyond  the 
capacity  of  any  one  man  to  furnish;  hence  several  men 
enter  into  a  combination  to  conduct  jointly  a  business 
enterprise  in  order  that  they  may  secure  the  benefits  of 
their  co-operative  wisdom.  In  the  third  place,  in  accord- 
ance with  the  teachings  of  the  modern  theory  of  risk, 
business  men  hesitate  to  put  all  their  eggs  in  one  basket 
and  assume  the  risks  that  follow  from  such  a  policy. 
Moreover,  the  individual  proprietor  cannot  avoid  the  risks 
by  organizing  and  managing  many  small  enterprises,  for 
in  the  first  place  any  one  of  such  enterprises  is  liable  for 
the  losses  suffered  by  any  other  of  the  business  enter- 
prises ;  in  the  second  place,  this  scattering  of  the  capital 
within  the  control  of  any  one  individual,  unless  he  is 
unusually  wealthy,  prevents  him  from  securing  the  econ- 
omies of  large-scale  production. 

Industries  to  which  Suited 

For  these  reasons  the  individual  proprietorship  is 
adapted  to  the  following  classes  of  industrial  enterprises 
only:  (1)  Those  where  the  capital  required  for  efficient 
production  is  small;  (2)  those  where  the  risks  of  con- 
ducting the  enterprise  are  relatively  slight;  (3)  those 
where  the  operations  are  simple  in  character  and  well 
understood  by  the  average  business  man.  Consequently 
organizations  in  which  the  skill  and  capital  of  a  number 
of  individuals  are  united  have  largely  superseded  the 
individual  proprietor  in  all  the  industries  which  require 
large-scale  production  to  secure  the  greatest  efficiency. 


Individual  Proprietorship  33 

TEST  QUESTIONS 

1.  Name  three  classes  of  business  which  are  not  open  to  in- 
dividual enterprisers  at  the  present  time  in  the  United  States. 

2.  What  are  the  chief  advantages  of  the  individual  proprietor- 
ship plan  of  business  ownership  ? 

3.  How  does  the  law  of  survival  of  the  fittest  apply  to  indi- 
vidual proprietorships  ? 

4.  To  what  classes  of  industries  is  the  individual  proprietor- 
ship especially  adapted? 

5.  How  large  a  business  would  you  conduct  on  the  individual 
proprietorship  basis  ? 

6.  What  three  big  disadvantages  does  the  individual  proprie- 
torship organization  enjoy  in  large  scale  production? 

7.  Does  the  individual  proprietorship   form  of  agricultural 
organization  promise  to  continue  ?     Why  ? 


CHAPTER  III 
the  partnership 

The  Nature  of  a  Partnership 

The  simplest  form  of  organization  by  which  the  skill 
and  capital  of  two  or  more  men  may  be  combined  for  the 
purpose  of  undertaking  the  management  of  business  en- 
terprises is  the  partnership.  The  partnership  may  be 
defined  as  "the  result  of  a  contract  between  two  or  more 
competent  parties  to  combine  their  money,  property, 
skill,  or  labor  for  the  prosecution  of  some  lawful  business 
for  profit. ' '  A  partnership  may  be  formed  by  the  mutual 
agreement  of  any  group  of  men  for  any  lawful  object. 
Each  of  the  partners  ordinarily  has  equal  rights  with  all 
the  others  in  the  management  of  the  business.  By  agree- 
ment, however,  the  rights  of  special  partners  may  be 
limited,  as  in  the  case  of  a  dormant  or  special  partner. 
The  partnership,  as  a  result  of  its  natural  characteristics, 
has  the  following  essential  features : 

(1)  Each  partner  is  agent  for  the  others  for  the  pur- 
pose of  conducting  the  business  for  which  the  partnership 
was  formed;  consequently  any  contract  properly  con- 
nected with  the  business  and  entered  into  by  any  one  of 
the  firm,  is  binding  on  the  partnership.  The  manage- 
ment is  in  the  control  of  the  several  members  of  the  part- 
nership, acting  both  jointly  and  severally.  Since  each  of 
the  members  has  equal  rights  with  all  the  others,  it  is 
impossible  to  conduct  a  partnership  business  through  the 
agency  of  a  selected  board  of  directors. 

34 


The  Partnership  35 

(2)  The  partnership  is  terminated  by  the  death  or  re- 
tirement of  any  one  of  the  partners,  and  hence  is  always 
an  organization  of  limited  duration.  It  is  a  personal  re- 
lationship, and  hence  a  partner  cannot  sell  his  interest 
to  a  third  party  except  with  the  consent  of  all  the  other 
partners,  in  which  case  a  new  partnership  is  formed,  al- 
though it  may  retain  the  old  name. 

(3)  The  partnership  is  not  recognized  in  legal  theory 
as  a  business  unit ;  in  case  of  business  troubles,  suits  are 
brought  against  one  or  more  of  the  individual  members 
of  the  firm  and  not  against  the  firm  itself.  All  the  per- 
sonal property  of  any  one  of  the  members  of  a  partner- 
ship may  be  attached  and,  on  judgment  by  a  court  of 
competent  jurisdiction,  sold  to  pay  the  debts  of  the  part- 
nership. In  case  of  insolvency,  each  partner  is  person- 
ally liable  for  all  the  partnership  debts. 

General,  and  Special  Partnerships 

Partnerships  are  classified  with  respect  to  the  scope  of 
their  business  operations  into  general  and  special.  A 
general  partnership  is  one  organized  for  the  operation  of 
some  general  line  of  business,  while  a  special  partnership 
is  one  formed  to  undertake  some  definite  task  or  some 
particular  line  of  business.  Most  commercial  and  pro- 
fessional partnerships  are  of  the  former  type,  while 
partnerships  formed  to  purchase  and  subdivide  a  piece 
of  real  estate,  to  finance  and  sell  patent  rights,  or  to  pro- 
mote and  underwrite  a  corporation,  are  examples  of  the 
latter.  Such  special  partnerships  are  often  known  as 
''syndicates." 

The  general  partnership  seems  to  have  developed  from 
the  special  partnership  in  relatively  recent  times.  la  Lue 
early  stages  of  the  world's  industrial  organization  the  in- 
dividual proprietor  was  the  characteristic  if  not  the  ex- 


36  Organizing  a  Business 

elusive  agency  through  which  business  enterprises  were 
conducted.  During  the  early  Middle  Ages  commerce  by 
sea  was  in  a  rapid  stage  of  development  and  many  vari- 
eties of  the  special  partnership  were  devised  and  ex- 
tensively used  for  the  purpose  of  sharing  the  risks  of 
commercial  undertakings  in  foreign  lands  and  on  the  high 
seas.  With  the  advent  of  the  modern  economic  system, 
late  in  the  sixteenth  century,  the  partnership  relation  was 
extensively  adopted  for  the  conduct  of  commercial  and 
manufacturing  organizations  at  home.  Since  such  or- 
ganizations were  expected  to  be  relatively  permanent,  the 
general  partnership  became  the  dominant  type  and  the 
special  partnership  was  reserved  for  more  temporary 
undertakings. 

Ordinary  and  Limited  Partnerships 

Partnerships  are  again  classified  with  respect  to  the 
liability  of  the  partners  into  ordinary  and  limited.  In 
the  former,  all  the  partners  are  subject  to  the  ordinary 
conditions  as  specified  above.  In  the  latter  type,  which 
may  be  formed  only  under  the  direct  authority  of  statute 
law,  some  of  the  partners  are  silent  and  inactive,  and 
their  liability  is  limited  by  the  amount  of  their  invest- 
ments. Such  partners  take  no  part  in  the  management 
of  the  business. 

The  Articles  of  Copartnership 

The  partnership  relations  are  determined  at  the  outset 
and  regulated  during  the  life  of  the  organization  by  an 
agreement  between  the  partners.  While  partnerships 
may  be  formed  by  oral  agreement,  they  are  ordinarily 
stated  in  writing,  and  in  such  case  the  statement  contain- 
ing the  contract  is  called  "the  articles  of  copartnership." 
After  the  articles  of  copartnership  are  once  drawn  up, 


The  Partnership  37 

they  can  be  changed  only  by  the  unanimous  consent  of  all 
the  members.  Hence  they  are  of  the  utmost  importance 
and  should  be  formulated  with  the  greatest  care. 

The  articles  of  copartnership  differ  with  the  character 
of  the  business  undertaking  and  the  extent  of  the  work 
which  is  undertaken  by  the  copartnership.  In  all  cases, 
however,  they  should  cover  the  following  subjects:  (1) 
The  partners  to  the  contract;  (2)  the  firm  name;  (3)  the 
purpose  for  which  the  copartnership  is  formed;  (4)  the 
investment  of  the  parties  and  the  division  of  profits  and 
losses;  (5)  the  character  of  the  accounting  system;  (6) 
the  conduct  of  the  business;  (7)  the  method  of  manage- 
ment; (8)  the  rights  of  the  partners;  (9)  the  dissolution 
of  the  partnership. 

PARTNERS  AND  THE  FIRM   NAME 

The  first  clause  in  the  articles  of  copartnership  should 
give  the  names  and  business  addresses  of  the  several 
members.  Since  a  partnership  is  a  contract,  only  those 
competent  to  enter  into  such  agreements  can  form  a  part- 
nership. The  list  includes  natural  persons  possessing  the 
necessary  qualifications,  other  partnerships,  and,  in  cases 
where  the  charter  specifically  provides  for  such  unions 
and  the  laws  permit,  the  corporation. 

In  connection  with  the  names  of  the  parties,  the  style 
of  the  firm  name  and  the  place  of  business  should  be 
given.  The  firm  name  may  be  either  that  of  the  parties 
to  the  agreement,  as  A  &  B,  one  or  more  of  the  parties  and 
some  phrase  including  the  others,  A,  B  &  Co.,  or  a  com- 
pany title,  as  The  Sunlight  Company. 

PURPOSES    OF    PARTNERSHIP 

The  second  section  should  state  the  purposes  for  which 
the  partnership  is  formed.    Since  a  partner's  rights  and 

^\0  5'^"G 


38  Organizing  a  Business 

duties  extend  only  so  far  as  the  activities  of  the  partner- 
ship necessarily  demand  for  its  successful  operation,  this 
clause  should  state  especially  the  character  of  the  busi- 
ness and  the  limits  to  which  the  business  operations  of 
the  firm  extend.  Otherwise  constant  internal  trouble  and 
often  litigation  follow  in  order  to  determine  the  field 
within  which  the  acts  of  any  one  of  the  partners  is  bind- 
ing upon  the  others.  For  example,  if  a  partnership  is 
formed  to  deal  in  particular  products,  the  names  of  such 
products  should  be  given  in  detail.  Thus  teas  and  cof- 
fees should  be  specified,  rather  than  groceries,  where  it  is 
the  purpose  of  the  agreement  to  limit  the  business  to 
these  two  articles. 

FINANCIAL  ARRANGEMENTS  OP  PARTNERS 

In  stating  the  investments  of  the  partners,  the  exact 
kinds  and  quantities  of  capital  contributed  by  each  should 
be  given  in  detail.  Where  the  investment  is  in  the  form 
of  money,  the  case  is  simple ;  where,  however,  the  invest- 
ment is  a  particular  piece  of  property,  or  particular 
stocks  of  goods,  or  a  firm  name,  good-will,  trademarks, 
etc.,  the  case  is  more  complex.  Especial  care  should  be 
taken  in  specifying  the  kinds  of  property  invested.  Since 
the  partner  has  no  claim  to  interest  on  his  investment, 
unless  by  express  agreement,  the  value  of  the  property 
upon  which  he  is  to  receive  interest  and  the  rate  at  which 
interest  is  to  be  reckoned,  should  be  stated  in  the  original 
agreement.  Furthermore,  since  the  parties  usually  give 
all  or  a  portion  of  their  time  to  the  firm's  business,  the 
salary  which  each  is  to  receive  should  also  be  included 
in  the  formal  agreement.  This  is  obviously  desirable 
since  sometimes  partners  who  contribute  the  larger  share 
of  capital  investment,  and  therefore  are  entitled  to  a 
larger  share  of  the  income  in  the  form  of  interest,  may 


The  Partnership  39 

be  less  valuable  members  from  the  salary  standpoint.  It 
is  clear,  of  course,  that  any  partner  who  draws  a  larger 
salary  from  the  firm  than  he  is  commercially  worth  is  to 
that  extent  receiving  a  part  of  his  partner 's  profits. 

ACCOUNTING    AND   AUDITING 

In  order  to  determine  the  profits  and  losses  it  is  neces- 
sary to  employ  a  proper  accounting  system.  It  is  desir- 
able to  specify  that  proper  books  of  accounts  should  be 
kept  and  that  scientific  methods  should  be  used  in  the  in- 
terpretation of  the  books  for  the  purpose  of  determining 
the  respective  share  in  the  profits  to  which  each  partner 
is  entitled.  In  general  there  are  two  methods  of  de- 
termining the  relative  profits:  (1)  from  an  audit  made 
by  the  members  of  the  firm  or  by  an  accountant  directly 
in  its  employ;  and  (2)  by  an  audit  made  by  an  independ- 
ent professional  auditor.  It  is  of  course  unnecessary  to 
provide  in  detail  how  the  accounts  should  be  kept. 
It  is  sufficient  to  require  that  the  proper  books  be  pro- 
vided and  that  they  be  periodically  balanced  and  audited. 
It  is  also  desirable  to  provide  that  any  member  may  have 
an  accounting  made  whenever  evidence  of  fraud  or  mis- 
management appears,  without  appeal  to  any  court.  In 
all  cases  where  a  partnership  conducts  a  business  of  some 
importance,  an  annual  audit  of  the  books  by  an  independ- 
ent professional  auditor  of  recognized  standing  and 
ability  should  be  provided  for  in  the  articles  of  copartner- 
ship. Such  audits  are  desirable  not  only  because  they 
are  likely  to  prevent  fraud,  but  because  they  are  one  of 
the  important  aids  to  good  business  management. 

POWERS  OF  INDIVIDUAL  PARTNERS 

Owing  to  the  fact  that  the  acts  of  each  partner,  so  far 
as  such  acts  may  be  reasonably  assumed  to  be  connected 


40  Organizing  a  Business 

with  the  partnership  business,  bind  the  firm,  and  that 
generally  all  the  members  take  part  in  the  active  manage- 
ment, it  is  always  desirable  to  state  the  extent  to  which 
this  general  principle  shall  apply  in  any  particular  part- 
nership. For  example,  it  is  possible  and  usually  desir- 
able to  provide  in  the  articles  of  copartnership  that  no 
one  of  the  members  shall  have  power  to  enter  into  a  con- 
tract involving  the  firm  above  a  certain  sum,  without  the 
agreement  of  all  the  partners  and  their  individual  signa- 
tures. It  is  also  possible  to  provide  that  in  the  employ- 
ment, direction,  and  management  of  employes,  especially 
of  heads  of  departments,  superintendents,  etc.,  the  con- 
sent of  all  members  shall  be  obtained  before  contracts 
are  entered  into.  It  is  also  desirable  in  certain  cases  to 
provide  that  one  of  the  members  shall  act  as  manager. 
This  may  be  done  by  an  agreement  of  the  members  in- 
serted in  the  articles  of  copartnership.  On  the  other 
hand,  it  may  be  desirable  to  provide  that  all  important 
matters  involving  new  ventures  or  new  methods  shall 
first  be  discussed  by  all  the  members  of  the  firm  and 
adopted  only  after  the  consent  of  the  majority  has  been 
obtained. 

EIGHTS  AND  DUTIES  OF  PARTNERS 

The  respective  rights  and  duties  of  the  partners  should 
be  explicitly  stated  in  the  articles  of  copartnership.  The 
time  which  each  is  to  give  to  the  business,  the  extent  to 
which  each  may  be  engaged  in  outside  undertakings,  the 
right  to  an  accounting,  the  right  to  purchase  or  sell  land 
or  other  property  belonging  to  the  firm,  the  right  to  make 
contracts,  the  right  to  undertake  individual  obligations 
which  may  interfere  with  the  credit  of  the  partnership — 
all  these  are  proper  subjects  for  determination  before  a 


The  Partnership  41 

partnership  is  organized,  and  should  be  included  within 
the  formal  contract  under  which  it  is  operated. 

It  is  also  desirable  to  specify  in  the  articles  of  copart- 
nership under  what  conditions  a  partner  may  withdraw, 
what  his  rights  are  in  case  of  dissolution,  and  his  share 
of  the  firm's  good-will.  The  dissolution  of  any  partner- 
ship may,  of  course,  be  provided  for  in  the  contract. 
This,  however,  is  often  left  to  the  mutual  consent  of  the 
parties.  In  certain  cases  it  may  be  forced  upon  them  as 
a  result  of  unfortunate  circumstances.  Wherever  disso- 
lution is  not  provided  for  in  the  original  contract,  and 
in  most  cases  even  though  such  be  the  case,  a  special 
clause  should  be  inserted  setting  forth  the  terms  under 
which  any  one  member  may  withdraw.  Circumstances 
may  arise  which  render  it  exceedingly  desirable  for  some 
one  member  to  withdraw  from  the  firm  and  engage  in 
other  business  activities  or  to  retire  from  business  en- 
tirely. At  the  same  time  it  may  be  exceedingly  desirable 
for  the  other  members  to  continue  the  business.  In  such 
a  case  the  retiring  member  is,  without  any  previous 
arrangements,  entirely  at  the  mercy  of  those  who  remain. 
And  it  is  too  often  the  case  that  the  retiring  member  fails 
to  get  his  share  of  the  property  and  the  property  rights 
of  the  partnership.  It  is  impossible  to  provide  in  ad- 
vance for  every  contingency ;  it  is,  however,  possible  in 
all  cases  to  provide  for  the  withdrawal  of  any  one  mem- 
ber and  for  a  proper  division  of  both  the  property  and 
good-will  of  the  firm  in  case  it  is  found  desirable  for  any 
one  to  retire. 

Dissolution  of  Partnerships 

Partnerships  may  be  dissolved  by  any  one  of  the  fol- 
lowing methods : 

1.  By  contract,  that  is,  by  mutual  agreement  between 


42  Organizing  a  Business 

the  partners  either  in  the  original  contract,  setting  a  time 
for  its  termination,  or  by  subsequent  agreement. 

2.  By  withdrawal  of  a  partner.  Withdrawal  is  a 
"power,"  but  not  a  "right,"  of  a  partner.  He  may  be 
liable  to  the  remaining  partners  for  actual  damages 
caused  by  his  withdrawal.  In  some  cases  specific  per- 
formance of  the  contract  may  be  compelled  where  ade- 
quate legal  damages  cannot  be  secured  for  the  injury 
which  would  follow  withdrawal. 

3.  By  bankruptcy  of  a  partner. 

4.  By  bankruptcy  of  the  firm. 

5.  By  the  death  of  a  partner. 

6.  By  war  between  nations  represented  by  the  con- 
tracting parties.  A  declaration  of  war  automatically 
breaks  off  all  partnership  agreements  between  citizens 
of  the  belligerent  powers. 

7.  By  court  decrees  in  case  of  misconduct  of  the  busi- 
ness, insanity  of  a  partner,  or  insolvency  as  indicated 
above. 

Conditions  of  Success 

It  is  impossible  to  provide  for  all  the  contingencies 
that  may  arise  in  the  conduct  of  any  business,  even  those 
of  the  simplest  character,  no  matter  how  perfectly  the 
general  principles  of  the  partnership  are  stated  or  how 
explicitly  the  details  are  drawn  up.  Much  must  depend 
upon  the  good  faith  of  the  parties  to  the  agreement.  In 
early  times  the  partnership  originally  seems  to  have 
grown  out  of  tba  family  relationship.  A  father  develops 
a  business  enterprise  and,  upon  his  son's  coming  of  age, 
gives  him  an  interest  in  it.  Later  other  sons  and  sons- 
in-law  are  added,  until  the  organization  becomes  of  con- 
siderable size.  When  the  father  dies,  the  tie  that  binds 
the  organization  loses  a  part  of  its  family  characteristics. 


The  Partnership  43 

Gradually  favorite  clerks  and  expert  workmen  are  taken 
into  the  partnership,  until  the  last  trace  of  its  original 
character  is  lost.  Even  though  it  retains  none  of  the  ties 
that  bind  the  family  together,  there  still  needs  to  be  ob- 
served between  the  members  of  the  partnership  the  same 
good  faith  that  ordinarily  exists  within  the  family  circle. 

The  partnership,  therefore,  above  all  other  forms  of 
business  organization,  demands  the  highest  standard  of 
business  honor.  The  members  of  a  partnership  may  de- 
ceive those  from  whom  they  purchase  materials,  cheat 
their  customers,  and  such  business  sins  may  be  over- 
looked if  not  forgiven.  But  lack  of  good  faith  between 
partners  is  death  to  the  partnership  form  of  business 
organization. 

Owing  to  the  right  of  each  member  of  the  partnership 
to  take  part  in  the  business  management,  this  form  of 
organization  cannot,  under  the  most  favorable  conditions 
of  business  morals,  be  used  for  conducting  the  larger 
business  enterprises.  Whenever  many  men  become  par- 
ties to  an  organization,  they  must  content  themselves 
with  choosing  leaders  and  surrender  to  a  selected  few 
their  rights  to  partake  in  the  active  management.  While 
the  partnership  may  designate  one  of  its  members  as 
business  manager,  still  the  important  questions  connected 
with  the  administration  of  a  business  in  the  larger  sense 
must  come  before  all;  consequently  the  partnership  is 
fitted  for  those  business  enterprises  where  only  a  few 
men  co-operate. 

It  follows  from  this  fact  that  the  partnership  can  or- 
dinarily command  only  a  limited  amount  of  capital,  and 
thus  its  operations  must  be  confined  to  those  fields  where 
small  plants  and  small  establishments  operate  with  the 
greatest  economy.  Partnerships  are  the  characteristic 
method  of  organization  for  conducting  small  manufac- 


44  Organizing  a  Business 

hiring  establishments,  retail  stores,  brokerage  business, 
contracting  on  a  small  scale,  and  for  professional  serv- 
ices where  the  personal  element  is  of  importance.  For 
larger  undertakings,  those  requiring  a  larger  investment 
of  capital,  the  corporate  form  of  organization  is  better 
adapted. 

Joint  Stock  Companies 

The  joint  stock  company  form  of  organization  was 
created  to  overcome  certain  of  the  handicaps  of  a  part- 
nership. It  partakes  of  the  character  of  the  partnership 
on  the  one  hand  and  of  the  corporation  on  the  other.  It 
may  be  designed  as  a  voluntary  association  of  individ- 
uals for  profit,  having  a  capital  divided  into  transferable 
shares,  ownership  of  which  is  the  condition  of  member- 
ship, and  managed  by  a  selected  board.  Such  companies, 
like  partnerships,  operate  under  the  principle  of  unlim- 
ited liability  of  the  individual  members. 

The  essential  features  of  a  joint  stock  company  are : 

1.  Capital  stock  divided  into  shares,  which  are  readily 
transferable. 

2.  The  shares  indicate  the  holder's  right  to  vote  as 
well  as  to  share  in  the  income  of  a  business  and  de- 
termine his  liability  for  losses. 

3.  Personal  or  unlimited  liability  of  the  members  for 
all  the  debts  of  the  concern  which  are  not  satisfied  by  the 
assets. 

4.  Authority  exercised  by  a  Board  of  Directors  chosen 
by  the  shareholders. 

The  articles  of  association  usually  state  the  object  of 
the  company;  the  number  and  amount  of  shares  and 
their  manner  of  assignment;  the  number,  selection,  and 
duties  of  the  directors ;  and  in  general  the  duties,  rights, 
and  obligations  of  the  members  among  themselves.    In 


The  Partnership  4i 

most  states  the  statutes  contain  special  provisions  gov- 
erning the  organization  of  such  companies. 

This  form  of  organization  was  of  considerable  im- 
portance in  the  middle  ages,  especially  in  connection 
with  the  development  of  trading  companies.  At  the  pres- 
ent time  it  is  not  nearly  so  common  as  the  partnership 
form  or  the  corporation  form,  yet  such  notable  examples 
of  joint  stock  companies  may  be  cited  as  the  Pierce- 
Fordyce  Oil  Association,  with  a  capitalization  of  sev- 
eral million  dollars,  and  the  Adams  Express  Company. 
The  chief  handicap  of  this  form  of  organization  is  its  un- 
limited liability  feature.  It  is,  however,  only  in  case  of 
bankruptcy  or  threatened  bankruptcy  that  this  feature 
becomes  of  practical  importance. 

Mining  Partnekships 

Mining  partnerships  exist  in  all  mining  communities. 
They  are  really  a  form  of  joint  stock  company.  The 
peculiar  risks  of  the  business  make  it  practically  impos- 
sible for  a  corporation  with  limited  liability  to  secure 
credit.  Furthermore,  development  is  usually  by  means 
of  leases.  The  mining  property  itself  is  outside  the  scope 
of  the  mining  partnership  and,  therefore,  profits  of  opera- 
tion alone  can  be  considered.  The  necessity  of  continu- 
ous operation  usually  exists  in  order  to  avoid  damages 
by  floods.  The  partnership  form,  with  its  danger  of  dis- 
solution at  any  moment,  is  evidently  not  well  adapted  to 
this  kind  of  work.  Therefore,  for  the  sake  of  enlisting 
large  numbers  of  members  in  the  enterprise,  securing 
credit  facilities,  and  maintaining  continuity  of  life,  min- 
ing partnerships  in  the  form  of  joint  stock  companies  are 
used  in  this  work. 


46  Organizing  a  Business 

TEST  QUESTIONS 

1.  How  may  a  partnership  be  defined? 

2.  What  are  the  four  essential  characteristics  of  a  partnership 
as  brought  out  in  the  definition? 

3.  Distinguish  between  general  and  special  partnerships.  Do 
you  know  of  a  concrete  case  in  which  a  special  partnership  was 
organized?    Do  you  see  any  application  to  your  own  affairs? 

4.  What  are  the  rights  of  a  limited  or  silent  partner?  Can 
a  limited  partnership  be  formed  in  your  state?  Under  what 
conditions  ? 

5.  Do  you  have  in  your  mind's  eye  in  the  form  of  a  picture 
the  nine  important  subjects  that  should  be  included  in  the  articles 
of  copartnership  ? 

6.  By  what  seven  different  methods  may  partnership  be  dis- 
solved ? 

7.  What  is  meant  by  "withdrawal  is  a  power,  but  not  a  right, 
of  a  partner ' ' ? 

8.  Under  what  conditions  and  for  what  classes  of  business 
would  you  use  the  partnership  form? 

9.  What  are  the  essential  features  of  a  joint  stock  company  ? 

10.  Under  what  conditions  would  you  organize  a  joint  stock 
company  ? 

11.  What  are  mining  partnerships?    Why  do  they  exist? 


CHAPTER  IV 

THE   CORPORATION 

A  Legal  Entity 

The  corporation  in  its  most  perfect  form  unites  so  far 
as  possible  the  best  features  of  the  individual  proprietor- 
ship and  the  partnership.  Like  the  former,  it  is  an  indi- 
vidual from  the  business  and  legal  point  of  view ;  like  the 
latter,  it  is  composed  of  a  group  of  individuals,  whose 
capital  and  skill  have  been  united  into  one  organic  union. 

According  to  Blackstone,  "the  corporation  is  an  arti- 
ficial person  created  for  preserving  in  perpetual  succes- 
sion certain  rights  which  being  conferred  on  natural  per- 
sons only  would  fail  in  the  process  of  time." 

Chief  Justice  Marshall,  in  the  classic  Dartmouth  Col- 
lege case,  defines  a  corporation  as  "an  artificial  being, 
invisible,  intangible,  and  existing  only  in  contemplation 
of  law." 

These  two  definitions  strike  the  keynote  of  the  great 
majority  of  legal  definitions  and  prevail  generally  among 
lawyers.  The  central  idea  is  that  of  an  artificial  person- 
ality or  legal  entity,  making  the  corporation  an  abstract, 
artificial  creature  of  the  law,  entirely  dissociated  from 
the  human  beings  that  organized  it.  It  is  a  business  unit 
made  up  of  a  group  of  natural  persons  who  have  lost 
their  identity,  from  the  standpoint  of  the  community,  for 
the  purpose  of  undertaking  some  particular  business 
enterprise. 

The  almost  complete  separation  of  stockholders  from 
the  corporate  entity  is  furthermore  shown  in  some  of 

47 


48  Organizing  a  Business 

the  legal  powers  of  a  corporation.  A  corporation  is  a 
legal  person  that  can  sue  and  be  sued  in  its  own  name. 
It  can  also  hold  property  in  its  own  name.  A  partner- 
ship can  do  neither. 

This  strictly  impersonal  conception  leads  directly  to 
the  conclusion  that  "a  corporation  has  no  soul."  It  is 
only  fair  to  state,  however,  that  recent  legal  decisions 
emphasize  more  and  more  the  associative  and  human  fac- 
tors in  a  corporation.  The  tendency  at  the  present  time 
is  to  go  beyond  the  artificial  personality  and  place 
responsibility  on  the  owners  and  managers  of  a 
corporation. 

A  Creattjke  of  the  State 

Unlike  a  partnership,  which  is  formed  by  the  mutual 
consent  or  agreement  of  the  parties,  a  corporation  is 
created  by  the  state  and  is  usually  spoken  of  as  a  creature 
of  the  state.  It  can  be  formed  only  through  the  formal 
action  of  some  duly  authorized  political  body,  such  as 
one  of  the  American  states. 

Until  comparatively  recent  times,  that  is,  until  early 
in  the  last  century,  corporations  were  authorized  only 
by  a  special  act  of  some  legislative  assembly.  Beginning 
about  1825,  several  states  introduced  the  policy  of  pro- 
viding for  the  formation  of  corporations  under  a  general 
corporation  act.  On  complying  with  the  terms  of  this 
act  and  paying  the  required  fees  of  registration,  compa- 
nies were  chartered  by  some  public  officer  designated 
for  that  purpose,  generally  the  secretary  of  state. 

The  change  from  incorporation  by  special  act  to  incor- 
poration under  a  general  act  was  advocated  and  finally 
adopted  about  ten  years  before  the  Civil  War,  in  all  the 
American 'states  for  the  following  reasons:  (1)  Under 
the  former  method  it  became  customary  to  grant  special 


The  Corporation  49 

privileges  to  certain  corporations  backed  by  powerful 
interests  or  by  friends  in  the  legislature ;  legitimate  busi- 
ness interests  having  no  influence  and  no  friends  at  court 
found  difficulty  in  securing  a  charter  at  all;  (2)  the 
legislatures  were  in  session  only  part  of  the  time,  and  it 
was  often  found  desirable  to  form  a  corporation  to  un- 
dertake some  special  business  enterprise  when  the  legis- 
latures were  not  in  session;  (3)  finally,  it  came  to  be  gen- 
erally recognized  that  freedom  of  incorporation  rather 
than  incorporation  at  the  will  of  some  political  authority 
was  demanded  by  the  legitimate  business  interests  of 
every  community.  Consequently,  under  the  influence  of 
these  three  forces,  the  former  method  was  gradually 
abandoned  and  the  method  of  incorporation  under  a 
general  act  was  almost  universally  adopted.  In  some 
states,  however,  at  the  present  time,  certain  kinds  of  cor- 
porations can  be  formed  only  by  special  act  of  the  legis- 
lature. In  other  states  the  legislature  reserves  the  right 
to  incorporate  companies  directly  whenever  in  its  judg- 
ment the  public  interests  demand  such  action. 

In  most  states,  however,  since  the  middle  of  the  nine- 
teenth century,  any  group  of  men  can  form  themselves 
into  a  corporation,  for  the  purpose  of  undertaking  any 
legitimate  business  enterprise,  simply  by  complying  with 
the  provisions  of  the  general  act,  filing  their  charter  with 
the  secretary  of  state,  and  paying  the  fees  required  by 
law.  The  usual  process  by  which  this  is  accomplished 
will  be  described  in  a  subsequent  section. 

Since  a  corporation  is  a  creature  of  the  state,  it  fol- 
lows that  it  possesses  only  those  powers  with  which  it  has 
been  endowed  by  the  state.  The  constitution  and  laws  of 
a  state,  together  with  the  charter  of  the  corporation,  are 
the  measure  of  its  corporate  powers.  Acts  done  outside 
of  the  grant  of  power  to  a  corporation  are  ultra  vires  and 


50  Organizing  a  Business 

cannot  be  enforced  by  the  corporation,  though  certain 
legal  liability  may  be  attached  thereto. 

As  a  necessary  result  of  the  method  by  which  corpora- 
tions are  formed,  namely,  by  an  act  of  some  political 
authority,  those  in  actual  existence  may  lack  some  of  the 
characteristics  which  are  necessarily  present  in  a  theoret- 
ically perfect  corporate  organization.  As  would  nat- 
urally be  expected,  the  earlier  corporations  have  only  a 
portion  of  these  normal  characteristics,  and  even  at  the 
present  time  some  corporations  which  lack  some  of  the 
characteristics  that  belong  to  such  organizations  are  cre- 
ated by  certain  states.  The  four  most  important  of  these 
characteristics  are  (1)  limited  liability,  (2)  continued 
existence,  (3)  transferable  shares,  and  (4)  centralized 
control. 

Limited  Liability 

In  the  corporation  as  organized  at  the  present  time 
liability  for  debts  due  creditors  is  by  law  placed  upon  the 
business  enterprise  or  enterprises  which  the  corporation 
owns  rather  than  upon  the  individuals  which  compose 
the  corporation.  The  individual  stockholder  is  conse- 
quently relieved  of  personal  liability,  and  in  case  of 
failure  loses  his  financial  investment  in  the  particular 
corporation  only. 

The  adoption  of  this  principle  in  law  has  been  of  slow 
growth.  The  Romans,  under  whose  system  of  jurispru- 
dence the  corporation  first  became  important,  recognized 
this  principle  to  a  limited  extent.  It  was  not,  however, 
until  the  fifteenth  or  sixteenth  century  that  the  corpora- 
tion achieved  much  importance  in  the  business  world  in 
England,  and  even  then  the  limitation  of  liability  was 
authorized  in  the  case  of  certain  corporations  only.  As 
a   general   feature   belonging   to   all    corporations    this 


The  Corporation  51 

peculiar  privilege  of  the  corporation  was  not  adopted 
generally  until  the  early  part  of  the  nineteenth  century. 

In  the  United  States  there  were  only  about  half  a  dozen 
corporations  created  before  1789,  and  the  number  was 
exceedingly  limited  until  after  the  beginning  of  the 
nineteenth  century.  With  the  advent  of  railroads  at  the 
end  of  the  first  quarter  of  the  nineteenth  century,  corpora- 
tions were  formed  in  increasing  numbers  for  the  purpose 
of  operating  railroads,  canals,  and  other  important  enter- 
prises. In  some  cases  they  were  granted  limited  liability, 
but  in  general  it  was  not  until  the  middle  of  the  last  cen- 
tury that  this  right  was  generally  recognized  in  the 
statute  law  of  the  various  states  of  the  Union. 

In  theory  the  adoption  of  the  principle  of  limited  lia- 
bility in  law  follows  from  the  recognition  of  the  corporate 
personality,  a  personality  distinct  from  that  of  the  indi- 
vidual stockholders  who  compose  it.  To  conceive  the 
corporation  as  an  individual,  one  must  lose  sight  of  the 
persons  of  which  it  is  made  up;  when  this  conception  is 
reached,  the  natural  individuals  being  lost  sight  of,  lia- 
bility for  debt  is  placed  upon  the  artificial  personage  in 
whom  all  the  individual  stockholders  are  merged. 

In  practical  affairs,  however,  the  adoption  of  the  prin- 
ciple is  to  be  credited  to  other  causes.  In  the  early  part 
of  the  nineteenth  century  New  York  and  Massachusetts 
were  the  leading  states  from  an  industrial  point  of  view. 
The  dangers  of  investment  in  partnerships  large  enough 
to  carry  on  the  business  undertakings  demanded  by  the 
times  called  for  changes  in  the  corporation  law,  of  which 
the  most  important  was  the  adoption  of  this  particular 
principle.  The  legislature  of  New  York  saw  the  oppor- 
tunity and  granted  the  privilege  demanded.  The  result 
was  a  remarkable  development  of  the  corporation  and  of 
corporate  enterprises  in  that  state.    Its  adoption  in  New 


52  Organizing  a  Business 

York  was  followed  by  the  same  action  in  Massachusetts, 
and  later  in  other  states,  with  similar  results. 

After  this  principle  had  been  generally  adopted,  none 
of  the  harmful  consequences  which  had  been  freely  pre- 
dicted followed.  Indeed,  from  a  strictly  economic  point 
of  view  there  are  good  and  sufficient  reasons  for  its 
adoption.  As  already  stated,  in  case  of  failure,  where  the 
principle  of  limited  liability  is  granted,  the  burden  of  the 
failure  is  placed  upon  the  business  itself  rather  than  upon 
individuals  and  other  business  enterprises  in  which  the 
individual  stockholders  have  invested.  Those  who  sell 
goods  to  a  partnership  are  often  glad  to  extend  credit  far 
beyond  the  point  which  the  business  of  the  firm  justifies, 
especially  in  cases  of  probable  bankruptcy,  in  order  to 
collect  from  some  of  the  wealthy  members  of  the  organi- 
zation. Those  who  sell  to  a  corporation,  on  the  contrary, 
know  that  the  corporate  property  only  is  liable  for  the 
debt  and  hence  discretion  in  extending  credit  to  a  cor- 
poration is  a  necessary  result.  Credit  is  extended  not  on 
the  individual  responsibility  of  the  stockholders,  but  on 
the  reputation  and  solvency  of  the  corporation  as  a 
whole. 

From  the  standpoint  of  the  stockholder  the  adoption 
of  this  principle  has  been  one  of  the  powerful  incentives 
to  save  and  invest  in  business  enterprises.  This,  to  a 
certain  extent,  accounts  for  the  rapid  development  of 
industry  through  the  agency  of  the  corporate  form  of 
enterprise. 

Continued  Existence 

Individuals  die ;  partnerships  are  terminated  by  agree- 
ment and  are  dissolved  for  many  unforeseen  reasons ;  but 
corporations  theoretically  may  live  forever.  When  an 
individual  proprietor  dies,  it  is  possible  that  his  business 


The  Corporation  53 

may  be  transferred  to  some  one  else  and  thus  continued. 
In  many  cases,  however,  such  enterprises  are  abandoned 
on  account  of  the  failure  to  find  anyone  who  cares  to  un- 
dertake the  proprietorship  and  management  of  the  busi- 
ness. Where  a  partnership  is  dissolved,  some  of  the 
partners  may  desire  to  continue,  and  they,  together  with 
other  men,  may  form  a  new  partnership  for  the  conduct 
of  the  same  business  enterprise.  It  is  difficult  to  find  a 
group  of  men  who  are  able  to  work  harmoniously  in  the 
intimate  business  relationship  which  the  partnership  de- 
mands, and  it  is  usually  difficult  for  any  one  of  the 
partners  to  find  a  person  who  cares  to  assume  the  re- 
sponsibilities which  belonged  to  a  former  member  of  the 
organization. 

In  the  case  of  a  corporation,  conditions  are  much  more 
favorable  to  the  continued  existence  of  the  organization. 
As  stated  by  Blackstone,  the  corporation  is  formed  for 
preserving  in  perpetual  succession  rights  which  other- 
wise might  terminate  owing  to  the  death  of  the  indi- 
viduals to  whom  they  belong.  In  the  corporation  this 
particular  feature,  namely,  perpetual  existence  of  the 
corporate  organization,  is  accomplished  by  means  of  the 
substitution  of  one  person  for  another  through  the  trans- 
fer of  property  rights.  When  A  dies,  his  shares  of  stock 
are  transferred  to  his  legal  heir  or  heirs  and  the  latter 
takes  his  place  in  the  corporate  organization.  Thus  it 
is  only  by  the  death  of  every  individual  at  the  same  time, 
an  impossible  supposition,  that  the  existence  of  the  cor- 
poration could  be  terminated  in  the  ordinary  way.  Under 
ordinary  circumstances  it  is  proper  to  say  that  the  cor- 
poration enjoys  perpetual  existence. 

Some  states  limit  the  duration  of  a  charter  to  a  certain 
period  of  years,  such  as  twenty,  fifty,  or  ninety-nine 
years.    This  is  especially  true  of  businesses  affected  with 


54  Organizing  a  Business 

a  public  interest,  such  as  banks,  public  utilities,  etc.  Un- 
less the  charter  of  a  corporation  or  the  constitution  and 
laws  of  the  state  under  which  it  is  issued  limit  the  life  of 
a  charter,  or  unless  the  constitution  or  statutes  of  the 
state  expressly  reserve  the  right  to  repeal  or  amend  a 
charter,  its  duration  is  perpetual.  When  the  power  to 
repeal  or  amend  charters  is  reserved  by  the  state,  it  may 
not  be  used  arbitrarily  or  unreasonably. 

The  life  of  a  corporation  may  be  terminated  in  any 
one  of  the  following  ways : 

1.  Voluntary  dissolution  upon  a  vote  of  the  stock- 
holders according  to  the  charter  and  legal  provisions. 

2.  Expiration  of  the  period  of  the  charter. 

3.  Insolvency. 

4.  Forfeiture  of  the  charter  to  the  state  for  misuse, 
non-use,  or  abuse  of  its  power. 

The  life  of  a  corporation  does  not  always  automatically 
end  when  the  corporation  ceases  to  do  business.  The 
corporation  will  continue  its  legal  existence  unless  its 
life  has  regularly  ended  by  one  of  the  above  methods. 

It  follows,  therefore,  that  a  corporation,  contrary  to  a 
partnership,  continues  for  the  term  of  its  existence, 
whether  it  be  a  period  of  years  or  perpetual.  Its  life  is 
uninterrupted  by  the  dissatisfaction,  financial  embar- 
rassment, insanity,  death,  or  retirement  of  its  stockhold- 
ers. The  entire  membership  may  change  again  and 
again,  just  as  a  stream,  which  remains  always  the  same, 
though  the  water  constantly  changes. 

Transferable  Shares 

The  shares  of  a  corporation  are  treated  as  personal 
property  and  may  be  sold  at  anj^  time  without  affecting 
the  corporate  existence.  For  this  reason  the  investments 
are  divided  into  small  amounts  of  such  size  that  the  ordi- 


The  Corporation  55 

nary  investor  may  purchase  at  least  one  share.  Corpora- 
tions appealing  to  the  smaller  investors  subdivide  their 
capital  stock  into  shares  of  smaller  denominations,  while 
those  which  appeal  to  the  larger  investors  issue  their 
shares  in  larger  amounts.  Consequently  by  a  proper 
subdivision  of  the  capital  stock  into  shares,  any  portion 
of  the  business  which  the  corporation  conducts  may  be 
sold  and  transferred  from  one  person  to  another  at  any 
time. 

In  this  respect  the  corporation  is  in  striking  contrast 
to  the  individual  proprietorship  and  the  partnership. 
The  individual  proprietor  must  sell  his  property  as  a 
whole  except  in  cases  where  it  may  be  operated  success- 
fully in  parts.  To  sell  a  portion  of  his  property  without 
division  creates  in  reality  a  partnership  of  interests. 
He  must  find  a  purchaser  who  desires  just  such  a  busi- 
ness enterprise  as  he  has  to  sell.  The  partner  cannot 
sell  his  interests  without  the  consent  of  all  the  other 
partners  and  therefore,  in  order  to  sell,  he  must  find  a 
man  who  is  personally  acceptable  to  all  members  of  the 
firm,  ordinarily  a  difficult  task.  A  partner  who  desires  to 
sell  out  his  interests  sometimes  finds  that  his  business 
associates  are  too  ready  to  take  advantage  of  his  desire 
to  sell  unless  such  contingency  has  been  carefully  pro- 
vided for  in  the  articles  of  copartnership.  Furthermore, 
the  selection  of  a  successor  is  made  doubly  difficult  owing 
to  the  fact  that  all  the  partners  are  managers,  and  hence 
the  successor  of  one  desiring  to  sell  his  interest  must  be 
not  only  an  acceptable  business  companion,  but  a  good 
business  man. 

Centealized  Control 

In  a  corporation  the  management  is  in  the  hands  of 
officers  selected  from  the  body  of  stockholders  and  em- 


56  Organizing  a  Business 

ployes  under  their  direction.  The  ordinary  stockholder, 
therefore,  takes  no  active  part  in  the  management.  He 
can  sell  his  interests  without  impairing  the  efficiency  of 
the  management.  The  market  for  shares  in  a  corpora- 
tion is  consequently  much  broader  than  in  the  case  of  a 
partnership.  Those  unable  to  take  part  in  the  manage- 
ment, including  widows,  children,  institutions  having 
trust  funds,  and  even  other  corporations,  are  in  a  po- 
sition to  purchase  and  hold  shares.  For  the  purpose  of 
making  such  transfers  the  facilities  of  a  broad  market 
are  furnished  by  the  stock  exchanges  which  exist  in  all 
the  larger  cities. 

In  its  management  the  corporation  is  like  the  indi- 
vidual proprietor.  Its  control  is  centralized  into  one  or- 
ganic unit,  a  board  of  directors  chosen  by  the  stockhold- 
ers to  represent  the  corporation  and  to  determine  its 
business  policy.  It  differs  from  the  partnership,  where 
all  the  members  are,  theoretically  at  least,  managers  and 
where  actually  all  generally  take  part  in  the  active  man- 
agement. It  is  true,  as  before  stated,  that  the  active 
management  of  a  partnership  may  be  entrusted  to  a 
managing  partner.  This,  however,  is  the  exception,  and 
not  the  rule.  The  general  efficiency  of  the  management 
in  a  partnership  is  determined  by  the  general  business 
ability  of  all  the  partners ;  in  the  corporation  the  stock- 
holders are  by  law  required  to  select  a  few  of  their  num- 
ber to  take  active  charge  of  the  business  policy. 

While  it  is  possible  that  in  certain  cases  men  of  small 
business  capacity  have  been  chosen  to  act  as  directors, 
generally  those  having  the  greatest  ability  as  business 
managers  are  chosen  upon  the  board  of  directors.  The 
corporation,  therefore,  possesses  practically  all  the  ad- 
vantages of  the  individual  proprietor  so  far  as  prompt- 
ness of  action  and  ability  to  meet  emergencies  are  con- 


The  Corporation  57 

cerned,  and  even  greater  advantages  than  the  partner- 
ship with  respect  to  collective  wisdom. 

The  authority  vested  in  the  central  administration  is 
subdivided  by  departments  and  sub-departments,  as  will 
be  fully  explained  in  a  volume  on  Industrial  Organization 
and  Management.  In  their  external  organization,  cor- 
porations resemble  an  army  with  its  general  staff,  gen- 
erals, colonels,  captains,  lieutenants,  and  soldiers.  In  the 
corporation  the  board  of  directors  corresponds  to  the  gen- 
eral staff.  Under  the  board  of  directors,  committees, 
the  president,  vice-presidents  in  charge  of  important  de- 
partments, division  superintendents,  and  section  bosses, 
form  the  complete  organization,  all  resting  upon  the  au- 
thority of  the  central  administration. 

In  the  organization  every  detail  of  administration  is 
parcelled  out;  the  work  of  management  is  specialized; 
the  responsibility  is  subdivided  from  the  central  office 
to  the  lowest  ranks,  so  that  every  one  has  his  duty,  and 
methods  for  determining  the  efficiency  with  which  each 
works  can  be  successfully  applied.  The  art  of  business 
management  under  the  corporate  form  of  organization 
becomes  a  science  and  in  our  larger  corporations  men  of 
the  broadest  experience  and  most  far-seeing  ability  are 
needed  to  prevent  disaster  and,  much  more,  to  insure 
success. 

The  four  characteristics  of  the  corporation  which  have 
been  described  above,  namely,  (1)  limited  liability,  (2) 
perpetual  existence,  (3)  ability  to  transfer  interests,  and, 
(4)  centralized  management,  are  features  which,  when 
combined  in  organic  union,  distinguish  the  corporation 
from  other  forms  of  business  organization. 

Classes  of  Corporations 

Corporations  may  be  divided  into  three  main  classes, 
eachrof  which  differs  in  some  of  the  important  character- 


58 


Organizing  a  Business 


istics,  but  all  are  alike  in  possessing  a  majority  of  the 
features  which  have  just  been  described.  These  three 
classes  are  (1)  municipal  corporations,  (2)  social  or  elee- 
mosynary corporations,  and  (3)  business  corporations. 
The  principal  subdivisions  of  the  three  main  classes  are 
shown  in  the  following  table : 


Municipal 


Eleemosynary     - 


Business 


Classes  of  Corporations 

Cities 

Counties 

School  districts 

Other  political  units 

Churches 

Schools  and  libraries 

Clubs,  lodges,  and  fraternal  organizations 

Charitable  organizations 


Industrial 


Commercial 


Public  service 


Financial 


{ 
{ 


Manufacturing 

Mining 

Wholesale  stores 

Retail  stores 

Railroads 

Street  railways 

Gas   companies 

Electric  light  companies 

Water  companies 

Banks 

Trust  companies 

Insurance  companies 


THE  MUNICIPAL  COEPORATION 

The  municipal  corporation  is  a  political  body  organ- 
ized for  the  purpose  of  carrying  on  certain  political  and 
often  business  functions.  An  example  of  this  class  is  the 
ordinary  city.  As  a  corporation  it  has  a  perpetual  ex- 
istence and  a  centralized  government.  Furthermore  the 
property  of  individual  citizens  cannot  be  taken  to  satisfy 
the  debts  which  the  city  government  owes.  The  city, 
however,  lacks  one  of  the  ordinary  characteristics  of  the 


The  Corporation  59 

corporate  organization,  namely,  a  citizen  cannot  sell  his 
citizenship  and  thus  dispose  of  his  portion  of  the  city's 
property.  When  he  leaves  the  city  domains  he  relin- 
quishes all  rights  to  his  investment  in  the  city,  which  by 
the  payment  of  taxes  he  has  helped  to  accumulate. 
Counties  and  school  districts  are  other  familiar  ex- 
amples. 

SOCIAL,  AND   ELEEMOSYNARY   CORPORATIONS 

The  club,  the  church,  the  hospital,  the  university,  are 
examples  of  social  corporations.  In  all  of  these  organi- 
zations, wherever  incorporated,  the  liability  of  the  indi- 
vidual member  is  limited  by  his  investment,  and  the  or- 
ganization is  perpetuated  by  the  initiation  of  new  mem- 
bers. In  each  case  they  select  a  board  to  conduct  the 
business,  and  again  are  like  the  municipal  corporation  in 
respect  to  the  right  of  the  individual  to  transfer  his  in- 
vestment. When  a  person  resigns  from  a  club,  he  loses 
his  right  to  a  share  in  the  common  property.  He  cannot 
sell  his  membership.  The  same  is  true  of  the  other  or- 
ganizations comprised  within  this  particular  class. 

THE  BUSINESS  CORPORATION 

Business  corporations  differ  in  their  important  charac- 
teristics from  the  above  classes  in  one  respect  only, 
namely,  the  interest  of  each  individual  is  represented  by 
a  share  called  a  ''stock  certificate,"  which  can  be  trans- 
ferred as  other  personal  property.  This  is  a  natural  re- 
sult of  the  purpose  for  which  business  organizations  are 
formed,  namely,  to  utilize  the  capital  and  skill  of  the 
members  in  earning  the  profits  to  be  divided  among 
themselves.  Municipal  and  social  corporations,  on  the 
other  hand,  while  engaged  in  performing  some  useful 
work  in  the  service  of  their  members  or  of  the  com- 


60  Organizing  a  Business 

niunity,  use  the  results  of  their  work  as  a  common  fund 
and,  except  at  the  termination  of  their  existence,  such 
corporations  do  not  subdivide  their  surplus  earnings. 

Business  corporations  are  generally  subdivided  into 
classes  based  upon  the  character  of  the  work  which  they 
undertake,  as  (1)  industrial  corporations,  (2)  commer- 
cial corporations,  (3)  public  service  corporations,  and 
(4)  financial  corporations.  The  first  includes  all  classes 
of  manufacturing  plants  and  mining  companies.  The 
second  includes  wholesale  and  retail  stores.  The  third 
class  includes  railroads,  electric  traction  companies,  gas 
companies,  electric  light  companies,  water  supply  com- 
panies, etc.  The  last  class  includes  banks,  trust  com- 
panies, and  insurance  companies. 

This  classification  is  of  importance  for  the  reason  that 
public  authorities,  when  granting  charters  determining 
the  conditions  under  which  corporations  may  live  and 
operate,  grant  more  extensive  powers  to  the  last-named 
classes,  but  at  the  same  time  regulate  their  internal  af- 
fairs and  their  business  operations  with  much  greater 
strictness.  In  the  corporation  acts  of  various  states 
there  are  ordinarily  at  least  three  parts — one  under 
which  the  industrial  and  commercial  corporations  are 
chartered,  one  under  which  public  service  corporations 
are  chartered,  and  a  third  authorizing  the  formation  of 
the  financial  and  moneyed  corporations.  The  conditions 
of  organization  and  their  rights  during  existence  differ 
widely  in  the  various  classes.  In  addition  to  obtaining 
their  charter,  public  service  corporations  are  usually 
obliged  to  obtain  certain  privileges  called  "franchises" 
from  the  municipality  or  territory  within  which  they 
carry  on  their  business.  Industrial  and  commercial  cor- 
porations, on  the  other  hand,  are  in  a  position  to  do  busi- 
ness as  soon  as  their  charter  is  granted  by  the  state. 


The  Corporation  61 

Since  corporations  chartered  under  the  various  sec- 
tions of  the  corporation  act  are  ordinarily  kept  distinct 
by  state  officials,  it  is  often  possible  to  secure  statistics 
showing  the  amount  of  investment,  the  size  of  corpora- 
tions, and  the  general  character  of  their  operations  in 
each  one  of  the  particular  kinds  of  business  enterprises 
which  have  been  described.  This  feature  of  the  corpora- 
tion law  is  of  considerable  importance  in  enabling  econo- 
mists, legislators,  and  business  men  to  compare  the  de- 
velopment in  the  various  lines  of  business  enterprise  and 
draw  conclusions  that  are  of  value  in  relation  to  the  in- 
dustrial development  of  any  particular  state  or  section. 

Private  corporations  are  often  classified  as  stock  and 
non-stock  corporations.  A  stock  corporation  exists  for 
private  gain  or  for  profit.  A  non-stock  corporation  does 
not  exist  for  profit  in  the  form  of  dividends,  but  for  some 
other  mutual  advantage  of  its  members.  Churches, 
lodges,  and  mutual  life  insurance  companies  are  ex- 
amples of  such  corporations. 

From  the  standpoint  of  the  sovereign  who  created  the 
corporation,  corporations  are  classified  as  domestic,  for- 
eign, and  alien.  A  domestic  corporation  is  created  by  the 
laws  of  the  state  in  which  it  operates.  It  is  foreign  in 
every  other  state  of  the  Union.  An  alien  corporation  is 
one  created  by  another  international  state,  as  England, 
for  example,  and  doing  business  in  this  country. 

A  further  classification  is  that  of  de  jure  and  de  facto 
corporations.  A  de  jure  is  one  legally  created.  A  de 
facto  is  one  not  legally  incorporated,  but  doing  business 
as  if  it  were.  A  de  facto  may  exist  only  when  some  rela- 
tively unimportant  legal  step  has  unknowingly  been 
omitted  or  overlooked  in  the  organization.  In  order  to 
be  a  de  facto  corporation,  there  must  be : 


62  Organizing  a  Business 

1.  Laws  under  which  the  company  could  have  incorpo- 
rated. 

2.  A  bona  fide  attempt  to  incorporate. 

3.  User  of  corporate  powers. 

Equity  demands  that  such  a  concern  should  not  be  en- 
joined from  continuing  its  life,  because  of  the  omission 
of  a  mere  technicality.  All  such  corporations  should, 
however,  take  immediate  steps  to  become  corporations 
de  jure.    A  few  corporations  exist  by  prescriptive  right. 

Advantages  of  Cokpokations 

The  advantages  resulting  from  the  important  charac- 
teristics of  the  corporation,  as  given  above,  namely,  limi- 
tation of  liability  of  the  individual  stockholder,  perma- 
nence of  the  corporate  existence,  transferability  of  rights 
in  the  corporation,  and  its  centralized  form  of  govern- 
ment, have  led  to  its  extensive  adoption  in  recent  years. 
In  addition  to  the  characteristics  already  described,  it 
has  the  advantage  of  great  flexibility  in  the  number  of 
those  interested  and  in  the  amount  of  capital  which  it 
employs.  A  corporation  can  be  formed  in  many  states, 
having  as  few  as  three  stockholders,  or  it  may  have  any 
number.  In  some  states  a  corporation  may  be  formed 
composed  of  only  one  person  and  therefore  having  only 
one  stockholder.  In  this  respect  it  differs  markedly  from 
the  individual  proprietor  or  the  partnership.  By  defini- 
tion, the  individual  proprietor  is  limited  to  one  person; 
for  practical  reasons  the  partnership  is  limited  to  com- 
paratively few  and  attains  its  greatest  success  when  it 
unites  from  three  to  ten  persons  only.  In  rare  cases 
partnerships  have  been  formed  with  twenty  or  more 
members;  such  partnerships  represent  an  unusual  type 
and  are  usually  disrupted  owing  to  internal  dissensions. 

Owing  to  its  flexibility  in  numbers,  the  corporation 


The  Corporation  63 

may  have  either  a  small  capital  or  a  large  capital,  ac- 
cording to  the  nature  of  the  business  which  it  is  formed 
to  operate.  It  may  compete  with  the  individual  proprie- 
tor and  the  partnership  in  its  economy  in  the  use  of 
capital,  and  it  may  under  other  circumstances  comprise 
a  sufficiently  large  number  of  people  to  gather  the 
amount  of  capital  sufficient  to  conduct  the  business  of  an 
entire  industry. 

Disadvantages  of  Corporations 

In  contrast  with  the  advantages  of  the  corporation  it 
is  well  to  notice  that  there  are  certain  disadvantages  that 
necessarily  belong  to  this  form  of  organization. 

In  the  first  place,  as  the  corporation  is  a  creature  of  the 
state,  it  is  usual  to  charge  certain  fees  for  incorporation 
of  a  business  enterprise  in  the  corporate  form.  The 
fees  charged  vary  in  different  states  from  a  merely  nomi- 
nal amount  to  an  amount  that  constitutes  a  tax  upon  the 
industry.  Most  states  also  charge  an  annual  license  fee, 
usually  small  in  amount,  which  must  be  paid  regularly  in 
order  that  the  corporation  may  continue  its  existence. 
In  addition  to  fees  for  incorporation  and  for  continued 
existence,  some  states  provide  a  special  form  of  taxation 
for  corporations,  and  thus  discriminate  against  this  form 
of  organization  as  compared  with  the  individual  proprie- 
tor or  the  partnership.  A  most  marked  example  of  this 
kind  was  the  Federal  Corporation  Tax  Law  enacted  by 
the  United  States  Congress. 

In  the  second  place,  the  states  usually  require  corpo- 
rations to  make  certain  reports  to  the  secretary  of  state 
or  some  other  officer,  showing  their  financial  condition 
and  other  details  in  regard  to  their  internal  organiza- 
tion. In  most  cases  such  reports  may  be  prepared  di- 
rectly from  the  annual  statements  made   by  the  com- 


64  Organizing  a  Business 

pany's  auditors.  In  certain  cases,  however,  as,  for  in- 
stance, the  railroads  in  the  United  States,  the  annual 
report  must  be  filed  as  of  the  thirtieth  of  June,  whereas 
a  large  number  of  the  corporations  make  their  reports 
cover  the  period  from  January  first  to  December  thirty- 
first.  This  necessitates  considerable  additional  expense, 
owing  to  the  preparation  of  accounts  covering  a  different 
period  from  that  which  the  company's  books  include. 
Again,  states  in  many  cases  require  details  which  would 
not  ordinarily  be  furnished  by  the  regular  books  of  the 
company,  thus  causing  additional  expense  on  this  ac- 
count. 

In  the  third  place,  the  corporate  form  of  organization 
necessitates  an  annual  meeting  of  the  stockholders  and 
the  preparation  of  elaborate  reports  for  their  informa- 
tion. While  most  of  the  stockholders  are  represented  by 
proxy,  the  expense  of  the  annual  meetings  cannot  be  en- 
tirely disregarded.  This  expense,  however,  is  one  that 
would  be  entailed  upon  any  large  organization. 

In  the  fourth  place,  the  corporation  is  managed  by 
men  who  are  employed  for  the  purpose  and  paid  for 
their  work.  The  individual  proprietor  works  for  himself 
and  receives  all  the  profits  directly.  In  the  partnership 
each  one  ordinarily  feels  the  direct  connection  between 
his  work  and  its  reward.  The  managers  of  a  corpora- 
tion, being  paid  for  their  services,  are  not  under  the 
same  influence  as  the  individual  proprietor  and  the  part- 
ner. It  is,  therefore,  necessary  to  apply  elaborate  means 
for  the  purpose  of  securing  efficiency  in  management. 
This  is  done  in  many  cases  by  the  use  of  statistical  aver- 
ages comparing  the  results  of  one  manager  with  those 
of  another  and  making  the  compensation  depend  largely 
upon  the  results  of  the  business  under  the  charge  of  any 
particular  officer  or  employe.     Such  means  of  securing 


The  Corporation  65 

efficiency  are  expensive  and  the  corporation  must  always 
be  willing  to  undertake  such  expenses,  considering  them 
the  necessary  disadvantages  of  this  particular  form  of 
organization  to  be  compensated  by  some  of  the  various 
advantages  which  have  been  named  above. 

In  the  fifth  place,  the  credit  of  a  corporation  depends 
entirely  upon  its  capital  and  its  business.  The  credit  of 
the  individual  proprietor  depends  not  upon  the  financial 
strength  of  the  business  enterprise  in  question,  but  upon 
the  proprietor's  entire  resources.  The  credit  of  the  part- 
nership is  dependent  upon  the  entire  resources  of  all  the 
partners  combined.  Consequently,  in  comparison  with 
these  forms  of  organization,  the  corporation  is  often  un- 
able to  extend  its  credit  to  the  extent  that  is  possible  in 
the  case  of  the  individual  proprietor  or  the  partnership. 
While  this  limitation  of  credit  is  desirable  from  the 
standpoint  of  industrial  development  as  a  whole,  it  is 
often  a  distinct  disadvantage  to  individual  corporations. 

Notwithstanding  these  several  disadvantages,  the  cor- 
poration, owing  to  its  marked  advantages  over  other 
forms  of  organization,  has  shown  remarkable  progress 
and  development  in  the  last  half  century.  To  quote  from 
an  article  by  the  author,  contributed  to  the  Yale  Review: 

Formerly  nearly  all  manufacturing  was  done  by  the  individual 
entrepreneur,  later  by  the  partnership,  now  by  the  corporation ; 
of  the  total  production  in  the  year  1900,  nearly  eight  thousand 
millions  in  dollars,  or  almost  60  per  cent  of  the  total  output,  was 
the  work  of  the  corporation.  Out  of  over  five  hundred  thousand 
independent  establishments  in  the  United  States,  forty  thousand 
in  round  numbers  were  in  corporate  form.  The  corporations  were 
12  per  cent  in  number  and  produced  59.5  per  cent  of  the  output. 
The  partnerships  were  18.9  per  cent  of  the  total  number  of  the 
establishments,  producing  19.7  per  cent  of  the  total  production. 
Individuals  owned  78.8  per  cent  of  the  number  of  establishments 


66 


Organizing  a  Business 


and  produced  only  20.6  per  cent  of  the  total  amount  of  produc- 
tion. In  certain  lines  the  progress  of  the  corporation  has  been 
particularly  rapid,  namely,  in  the  manufacture  of  iron  and  steel, 
agricultural  implements,  coke,  gas,  electrical  apparatus,  manu- 
t'.i -tured  ice,  rubber  goods,  photographic  goods,  etc.,  etc.  Thus 
concentration  is  accomplished  through  the  corporation,  and  to- 
day, in  a  word,  the  corporation  problem  has  to  all  intents  and 
purposes  superseded  the  trust  problem  of  the  previous  decade. 

Since  1900  the  United  States  census  has  separated  all 
the  manufacturing  establishments  in  the  United  States 
into  four  classes,  as  follows :  The  individual  proprietor, 
the  partnership,  the  incorporated  company,  and  miscella- 
neous forms  of  business  organizations.  From  the  infor- 
mation thus  gathered  it  is  possible  to  measure  the  growth 
of  the  corporation  as  compared  with  other  forms  of 
business  organization,  at  each  of  the  census  periods. 
The  table  below  shows  the  changes  in  the  character 
of  the  business  organizations  that  took  place  in  the  ten 
years  from  1900  to  1910.  It  is  probable  that  the  rate  of 
growth  which  the  corporation  maintained  in  the  years 
from  1900  to  1910  has  been  at  least  equaled  during  the 
period  from  1910  to  1915. 

Manufacturing  Industries 


Establishments 

I'lIAKAOTEB  OF 

Ownership  > 

1910 

1900 

Number 

Per  cent 

Number 

Per  cent 

United  States 

268,491 

140,605 

54,265 

69,501 

4,120 

100.0 

52.4 

20.2 

25.9 

1.5 

273,705 

171,843 

62,627 

37,161 

2,074 

100.0 
62.8 
22.9 

Incorporated  Co.  . .  . 
Miscellaneous    

13.6 
0.7 

i  Special  reports  of  the  Census,  Manufacturers,  Pt.  I,  1910.     The  tables, 
while  not  exactly  comparable,  are  sufficiently  accurate  for  our  purpose. 


The  Corporation 


67 


Products 

Character  of 
Ownership 

1010 

1000 

Value                Per  cent              Value 

Per  cent 

United  States   

Firm 

$20,672,051,870 

2,042,061,500 

2,184,107,632 

16,341,116,634 

104,716,104 

100.0 

9.9 

10.6 

79.0 

0.5 

$11,701,295,854 

1.837,599,353 

2,226,833,804 

7,606,019,056 

30,843,641 

100.0 
15.7 
19.0 

Incorporated  Co. . .  . 

65.0 
0.3 

TEST  QUESTIONS 

1.  What  is  Chief  Justice  Marshall's  famous  definition  of  a 
corporation?  In  what  respects  has  this  conception  of  a  corpora- 
tion been  modified  in  recent  years? 

2.  "What  is  the  distinction  between  incorporation  under  a 
special  act  and  incorporation  under  a  general  act  of  the  legis- 
lature ? 

3.  For  what  reasons  have  American  states  generally  adopted 
a  general  corporation  law? 

4.  What  are  four  important  characteristics  of  a  corporation  ? 

5.  What  is  the  advantage  in  the  principle  of  limited  liability? 

6.  Compare  the  management  of  a  corporation  with  that  of 
the  individual  proprietorship ;  with  that  of  the  partnership. 

7.  In  what  ways  may  the  life  of  a  corporation  be  terminated  ? 

8.  What  are  the  chief  classes  of  business  corporations?  Why 
classified  ? 

9.  What  is  the  distinction  between  stock  and  non-stock  cor- 
porations? domestic,  foreign,  and  alien  corporations? 

10.  What  things  are  necessary  to  constitute  a  de  facto  cor- 
poration ? 

11.  According  to  the  United  States  census  reports,  what  is  the 
tendency  in  the  growth  of  corporations  as  compared  with  other 
forms  of  business  organization  ? 

12.  How  does  the  volume  of  products  turned  out  by  corpora- 
tions compare  with  that  turned  out  by  partnerships  and  indi- 
vidual proprietorships  in  the  United  States? 


CHAPTER  V 
the  formation  op  the  corporation 

Promotion 

The  individual  proprietor,  having  command  of  the 
necessary  capital,  can  engage  at  once  in  any  lawful  busi- 
ness without  formality  of  any  kind.  The  formation  of  a 
partnership  is  somewhat  more  complex  since  it  requires 
the  agreement  of  several  men,  each  contributing  a  share 
of  the  capital,  and  each,  under  ordinary  circumstances, 
taking  part  in  the  management  of  the  business.  When 
the  capital  has  been  collected  and  the  terms  of  the  part- 
nership arranged,  the  firm  may  then  purchase  its  plant 
and  machinery,  appoint  superintendents,  hire  laborers, 
and  at  once  set  out  upon  its  business  career. 

Like  the  partnership,  the  corporation  requires  an 
agreement  among  several  men  to  contribute  capital  to 
engage  in  a  particular  line  of  business.  It  does  not,  how- 
ever, require  an  arrangement  between  the  parties  to  un- 
dertake the  active  work  of  management.  In  order  to 
form  a  corporate  organization  the  voluntary  action  of  a 
group  of  men  is  necessary,  such  group  in  certain  cases 
meeting  by  agreement  and  drawing  up  the  terms  under 
which  they  are  willing  to  engage  in  some  particular  en- 
terprise. While  this  method  is  common  in  small  under- 
takings, it  is  not  adapted  to  the  formation  of  large  com- 
panies. Owing  to  the  fact  that  subscribers  to  the  shares 
of  stock  in  a  corporate  enterprise  usually  live  in  widely 
separated  districts,  the  larger  corporations  are  pro- 
moted by  some  person  who  devotes  his  time  to  formulat- 

68 


Formation  of  Corporations  69 

ing  a  plan  for  the  formation  of  the  corporation,  securing 
the  necessary  subscribers  for  the  capital  stock,  and  ar- 
ranging the  details  connected  with  the  beginning  of  its 
legal  existence.  The  task  of  the  promoter  consists  in 
finding  and  selecting  the  opportunity  for  undertaking 
some  profitable  business  enterprise,  securing  the  neces- 
sary capital,  and  providing  at  the  beginning  efficient 
management. 

Financing  the  Enterprise 

After  selecting  the  enterprise  the  important  work  of 
the  promoter  is  in  securing  the  necessary  capital.  This 
may  be  accomplished  either  by  personal  solicitation 
through  established  bond  or  brokerage  houses,  through 
sale  upon  the  stock  market,  or  by  direct  appeal  to  the 
public  through  advertisements  in  the  public  press. 

In  smaller  corporations,  especially  those  having  a 
local  constituency,  the  personal  solicitation  of  share 
holders  is  the  usual  method  employed.  A  subscription 
contract  is  prepared,  stating  the  essential  features  of  the 
corporation  to  be  formed.  This  contract  is  signed  by  those 
who  subscribe  for  the  stock.  Opposite  the  name  the  num- 
ber of  shares  of  each  subscriber  is  indicated. 

In  the  formation  of  larger  enterprises  an  appeal  is 
usually  made  to  the  investing  public  through  one  or  sev- 
eral of  the  above-described  means.  Established  bond  or 
brokerage  houses  have  floated  the  securities  of  a  number 
of  our  largest  corporations  and  consolidations.  Some 
of  the  best  known  of  these  houses  are  J.  P.  Morgan  &  Co. ; 
Kuhn,  Loeb  &  Co. ;  Harvey  Fisk  &  Sons ;  Lee,  Higginson 
&  Co. ;  Kidder,  Peabody  &  Co. ;  and  Speyer  &  Co.  These 
banking  houses  frequently  form  underwriting  syndicates 
and  dispose  of  securities  through  the  syndicate. 

Securities  disposed  of  through   the  stock  exchanges 


70  Organizing  a  Business 

must  usually  be  listed  according  to  the  rules  of  these 
exchanges.  After  they  are  once  listed  the  promoter  loses 
practically  entire  control  of  the  sale  of  the  securities. 
Speculative  movements  are  apt  to  operate  with  a  great 
deal  more  force  on  the  exchange  than  when  securities  are 
disposed  of  through  an  underwriting  syndicate. 

"When  an  appeal  is  made  to  the  general  investing  public 
through  the  public  press,  a  statement  is  made,  showing 
the  character  of  the  enterprise,  the  securities  to  be  is- 
sued, and  usually  a  statement  of  prospective  earnings. 
Inquiries  to  these  advertisements  are  followed  up  by  let- 
ters and  alluring  prospectuses. * 

All  statements  made  by  a  promoter  either  orally  or  in 
writing  with  regard  to  the  enterprise  are  subject  to  the 
general  principles  of  the  law  relating  to  fraud.  A  pro- 
moter is  bound  not  only  to  make  his  statements  accurate, 
but  also  not  to  omit  any  facts  of  vital  importance.  He  is 
furthermore  in  a  sense  a  trustee  of  the  interests  of  the 
corporation  that  he  is  organizing.  He  should  act  in  good 
faith  for  its  benefit.  Secret  profits  and  fraud  when 
proved  are  regarded  as  illegal  by  the  courts.  His  con- 
tracts and  promises  are  personal  obligations  until  they 
have  been  accepted  and  ratified  by  the  corporation  after 
it  comes  into  existence.  Ratification  may  be  specific  or 
implied. 

The  Choice  of  a  State 

In  centralized  governments,  like  England  and  France, 
charters  for  business  enterprises  are  obtained  only  from 
the  central  government  and  consequently  the  promoters 
have  no  opportunity  to  choose  between  several  states, 
each  authorized  to  grant  charters.     In  federal  govern- 

i  These  financing  problems  are  adequately  treated  in  the  section  of  this 
service  on  Financing  a  Business. 


Formation  of  Corporations  71 

ments,  like  the  United  States  and  Australia,  there  is  usu- 
ally an  opportunity  to  choose  between  the  different  gov- 
ernments. For  some  enterprises  in  the  United  States, 
however,  a  federal  charter  is  required;  for  example,  a 
banking  organization  desiring  to  undertake  national 
banking  functions.  In  general  the  proposed  organiza- 
tion has  the  choice  between  a  state  charter  authorizing 
it  to  become  a  state  bank  or  a  national  charter  authoriz- 
ing it  to  become  a  national  bank. 

In  the  case  of  an  ordinary  corporation  desiring  to  en- 
gage in  business  of  a  general  nature,  such  as  manufactur- 
ing, trading,  etc.,  it  is  at  the  present  time  necessary  to  se- 
cure a  charter  from  some  one  of  the  individual  states.  In 
the  case  of  banks,  railways,  and  public  service  corpora- 
tions, it  is  in  practically  all  cases  necessary  to  have  a 
charter  from  the  state  in  which  the  business  of  the  corpo- 
ration is  to  be  located.  For  manufacturing  and  trading 
concerns  the  case  is  different.  Ordinarily  such  a  cor- 
poration may  take  out  a  charter  either  in  its  own  state 
or  in  any  one  of  a  considerable  number  of  states  which 
permit  the  formation  of  corporations,  to  do  business 
either  within  its  own  borders  or  in  other  states.  Conse- 
quently the  promoter,  having  the  choice  of  a  number  of 
jurisdictions,  is  in  a  position  to  select  that  one  which  he 
considers  most  favorable  to  himself  or  to  the  future  suc- 
cess of  the  corporation  which  he  is  forming.  While  the 
general  provisions  of  the  various  states  have  a  striking 
similarity,  they  differ  in  a  number  of  points,  which 
are  of  considerable  importance  to  the  future  of  a 
corporation. 

In  some  states  the  corporation  law  and  policy  are  well 
settled  and  those  incorporating  under  the  laws  of  such 
states  have  reason  to  believe  that  the  policy  observed  in 
the  past  is  likely  to  be  continued  in  the  future.    Such  con- 


72  Organizing  a  Business 

ditions  attract  legitimate  business  enterprises.  The  fees 
charged  by  the  state  for  incorporating  a  company  and 
for  the  annual  license  differ  widely.  For  example,  Ari- 
zona charges  $10  for  the  incorporation  of  any  company, 
without  regard  to  the  amount  of  its  capitalization,  while 
Connecticut  charges  $25  for  the  incorporation  of  a  com- 
pany having  a  capital  of  from  $10,000  to  $50,000,  and  $1 
for  every  $2,000  of  capital  stock  authorized  of  $50,000 
or  more.  The  rate  in  New  York  is  the  same  as  that  of 
Connecticut.  New  Jersey  has  a  more  liberal  policy  than 
Connecticut,  but  much  more  conservative  than  Arizona. 
The  New  Jersey  rates  are  $25  for  any  corporation  up  to 
$100,000,  and  for  corporations  above  this  amount  20 
cents  for  every  $1,000  of  the  total  amount  of  capital  stock 
authorized.  Maine,  formerly  one  of  the  more  conserva- 
tive states,  has  recently  entered  upon  a  policy  of  grant- 
ing charters  upon  favorable  terms  and  requires  a  fee  of 
$10  for  $10,000  capitalization,  $50  for  a  corporation  from 
$25,000  to  $500,000,  inclusive ;  and  for  corporations  above 
$500,000,  $10  for  every  $100,000  of  capital  stock. 

The  states  differ  considerably  in  regard  to  the  liberal- 
ity of  the  charter.  Some  limit  the  amount  of  capital 
stock  that  may  be  issued;  some  require  that  the  direc- 
tors' and  stockholders'  meeting  shall  be  held  within  the 
state  from  which  the  corporation  has  its  charter;  some 
require  that  the  capital  stock  shall  be  paid  for  in  money ; 
and  some  forbid  corporations  to  own  shares  of  stocks  in 
other  corporations.  Accordingly,  if  a  corporation  de- 
sires to  issue  $25,000,000  worth  of  stock,  it  can  not 
take  out  a  New  Hampshire  charter,  where  the  amount 
of  authorized  capital  is  limited  to  $5,000,000.  If  it  wishes 
to  hold  a  stockholders'  meeting  outside  of  the  state,  it 
can  not  take  out  a  New  Jersey  charter.    If  it  desires  to 


Formation  of  Corporations  73 

hold  stock  in  other  corporations,  it  can  not  take  out  an 
Illinois  charter. 

The  promoters,  therefore,  after  determining  upon  the 
character  of  the  enterprise,  select  the  state,  having  re- 
gard to  the  various  points  mentioned,  choosing  that 
which  they  consider  most  favorable  to  the  corporation 
which  they  are  forming.  At  the  present  time,  New  Jer- 
sey, Maine,  Delaware,  Arizona,  Nevada,  and  South  Da- 
kota, and  several  other  states,  are  called  the  leading  char- 
ter-granting states  on  account  of  the  lower  fees  and  the 
more  liberal  terms  granted  to  incorporators. 

In  some  cases  corporations  take  out  charters  in  several 
states,  for  example,  railways  operating  lines  in  adjoining 
states.  Such  charters  are  usually  identical  in  terms,  so 
far  as  practicable,  and  have  the  same  stockholders  and 
the  same  officers.  On  account  of  their  practical  identity 
it  has  become  a  fairly  well-settled  principle  of  law  to  re- 
gard such  corporations  as  a  single  corporation. 

The  Peocess  of  Formation 

Each  state  prescribes  a  routine  method  which  must  be 
followed  under  its  corporation  law  by  those  who  desire 
to  take  out  a  charter.  The  process  is  in  its  general  de- 
tails quite  similar,  but  differs  in  certain  particulars.  For 
purposes  of  illustration,  the  routines  prescribed  by  the 
states  of  Illinois  and  New  Jersey  have  been  selected  and 
are  given  below. 

The  general  corporation  act  of  Illinois  provides  that 
any  number  of  natural  persons  from  three  to  seven,  in- 
clusive, desiring  to  form  a  corporation,  shall  file  a  state- 
ment with  the  secretary  of  state,  giving  the  name  of  the 
proposed  corporation,  the  objects  for  which  it  is  formed, 
the  amount  of  the  capital  stock,  the  number  of  shares  and 
the  .value  of  each,  its  principal  office  and  the  period  for 


74  Organizing  a  Business 

which  it  is  to  be  formed,  not  to  exceed  ninety-nine  years. 
The  statement  above  described  must  be  signed  by  each  in- 
corporator and  acknowledged  before  some  officer  author- 
ized to  acknowledge  deeds.  This  statement  is  then  sent 
to  the  secretary  of  state  and,  if  the  purpose  for  which  it 
is  proposed  to  form  the  corporation  is  lawful,  the  said 
officer  issues  a  permit  authorizing  the  incorporators  to 
act  as  commissioners  to  open  books  for  the  purpose  of 
securing  subscriptions  to  the  capital  stock. 

After  being  properly  authorized,  the  commissioners 
open  the  books  to  secure  subscriptions  for  the  full 
amount  proposed  in  the  original  statement.  When  the 
full  amount  is  subscribed,  the  commissioners  call  a  meet- 
ing, giving  the  proper  notice,  for  the  organization  of  the 
corporation  and  the  election  of  officers.  The  officers  then 
collect  at  least  one-half  of  the  total  amount  subscribed 
and  make  a  full  report  of  the  meeting,  giving  the  sub- 
scription list,  the  amount  paid  in  upon  the  same,  whether 
any  of  the  capital  stock  has  been  paid  for  in  property 
and  if  so  the  fair  cash  value  of  the  property,  and  the 
names  of  the  directors.  This  report  must  be  signed  by 
a  majority  of  the  commissioners  and  filed  in  the  office  of 
the  secretary  of  state.  The  secretary  of  state  then  is- 
sues the  charter,  which  upon  its  receipt  is  filed  in  the  of- 
fice of  the  recorder  of  deeds  of  the  county  in  which  the 
chief  office  of  the  corporation  is  located.  The  company 
then  is  legally  organized  and  must  proceed  to  business 
within  two  years  from  the  date  when  its  charter  is  issued 
or  the  charter  will  be  legally  forfeited. 

As  compared  with  the  Illinois  method,  that  prescribed 
by  the  state  of  New  Jersey  in  the  general  corporation  act 
is  exceedingly  simple.  Under  the  New  Jersey  law,  three 
or  more  natural  persons  may  draw  up  an  agreement  for 
the  purpose  of  forming  a  corporation  under  the  general 


Formation  of  Corporations  75 

corporation  act,  specifying  the  name,  the  objects  for 
which  it  is  formed,  the  amount  of  stock,  and  the  period 
for  which  it  is  formed.  They  may  then  secure  subscrip- 
tions for  the  full  amount  of  the  capital  stock,  requiring 
each  subscriber  to  sign  his  name,  showing  the  amount 
for  which  he  subscribes  and  his  post-office  address.  The 
charter  as  drawn  up,  with  its  subscribers,  must  then  be 
approved  in  the  same  manner  as  is  required  by  law  in  the 
case  of  deeds  for  the  transfer  of  real  estate.  It  is  then 
recorded  in  the  office  of  the  clerk  of  the  county  where 
the  principal  office  of  the  corporation  is  located,  and 
finally  is  filed  with  the  secretary  of  state,  when  its  legal 
existence  begins. 

The  Capitalization 

It  will  be  noticed  that  in  each  case  the  capitalization 
must  be  determined  before  the  corporation  enters  upon 
its  legal  existence.  By  capitalization  is  meant  all  stocks 
and  bonds  issued,  or,  in  a  more  limited  sense  of  the  word, 
the  total  amount  of  stock  authorized.  The  capitalization 
may  be  equal  to  the  amount  of  assets  which  the  corpora- 
tion possesses  or  it  may  be  greater  or  less  than  the  assets. 
When  the  stocks  and  bonds  issued  by  the  corporation  are 
sold  at  par,  the  amount  of  capitalization  will  be  equal  to 
the  amount  of  assets ;  if  they  are  sold  above  par,  the  assets 
will  exceed  the  capitalization;  and  if  either  one  or  both 
are  sold  at  less  than  par,  the  capitalization  will  exceed  the 
assets  and  the  stock  is  said  to  be  watered  or  the  corpora- 
tion over-capitalized. 

Having  determined  upon  the  operation  of  a  particular 
kind  of  business,  the  promoters  are  in  a  position  to  decide 
the  amount  of  assets  which  are  necessary  in  order  to  carry 
on  the  business  properly.  Suppose,  for  example,  it  has 
been  decided  to  engage  in  the  manufacture  of  pianos.  The 


76  Organizing  a  Business 

promoters  ask  bow  much  capital  is  required  to  manufac- 
ture pianos  at  a  low  cost  at  the  point  where  the  factory  is 
to  be  located.  If  they  find  themselves  unable  to  raise  the 
amount  of  capital  necessary  to  undertake  such  a  business 
in  the  proper  way,  then  their  project  should  be  abandoned 
or  the  corporation  should  devote  itself  to  some  other  busi- 
ness enterprise  requiring  a  smaller  amount  of  capital.  On 
the  other  hand,  it  is  possible  to  extend  the  field  from 
which  subscribers  are  originally  selected  and  thus  secure 
a  larger  amount  of  capital  by  appealing  to  a  larger  con- 
stituency. 

Bonds 

Assuming  that  the  enterprise  has  been  selected  and 
that  the  promoters  find  themselves  able  to  raise  the  nec- 
essary amount  of  capital,  they  must  then  decide  how 
much  of  this  capital  should  be  in  the  form  of  bonds  and 
how  much  in  the  form  of  stock.  The  bondholder  is,  from 
the  broader  point  of  view,  a  member  of  the  corporation 
who  has  relinquished  any  right  which  he  might  have  had 
in  directing  the  management  of  the  enterprise,  for  the 
sake  of  having  his  property  secured  by  a  first  claim  upon 
the  assets.  He  receives  a  lower  rate  of  return  as  compen- 
sation for  the  security  he  receives.  Since  many  investors 
desire  safety  above  everything  else  and  are  not  in  a  po- 
sition to  take  part  in  the  management,  a  considerable 
portion  of  the  capital  of  every  business  enterprise  is  bor- 
rowed. Under  the  corporate  form  of  organization  those 
who  subscribe  in  this  way  hold  bonds  as  evidence  of  their 
contributions.  If  bonds  are  issued  above  the  value  of  the 
property  upon  which  they  are  secured  at  a  forced  sale, 
under  the  most  unfavorable  conditions,  it  is  usually  im- 
possible to  sell  them  at  their  face  value  unless  the  rate  of 
interest  is  made  unduly  high.    Consequently  those  form- 


Formation  of  Corporations  77 

ing  the  corporation  find  it  desirable  to  borrow  only  a 
limited  portion  of  the  capital  upon  bonds  and  to  make  the 
rate  of  interest  fairly  low. 

Stock 

Having  determined  the  amount  that  may  be  raised  by 
the  issue  of  bonds,  all  the  remaining  capital  must  neces- 
sarily be  subscribed  by  the  stockholders.  In  the  issuing 
of  stock,  the  simplest  method  is  to  issue  one  kind  only, 
which  is  then  called  common  stock.  Since  the  stock  is  all 
alike,  there  is  no  opportunity  for  discrimination  among 
classes  of  stockholders ;  all  have  the  same  rights,  all  take 
the  same  risks,  and  all  share  the  losses  and  the  profits 
equally.  By  subtracting  the  amount  received  from  the 
bond  issue  from  the  total  amount  of  capital  necessary  for 
the  proper  operation  of  the  business,  the  amount  which 
must  be  secured  through  subscriptions  for  the  capital 
stock  is  determined.  By  dividing  this  amount  into 
shares  of  a  certain  amount,  for  example,  $100,  the  num- 
ber of  shares  may  be  calculated  and  if  the  stock  is  sold 
at  par,  when  all  the  stock  is  subscribed  for  and  the  sub- 
scriptions collected,  the  corporation  will  be  in  possession 
of  that  amount  of  capital  which  the  promoters  consider 
necessary  for  the  particular  business  which  it  is  to  un- 
dertake. 

SHARES  OF  STOCK 

The  capital  stock  of  a  corporation  is  divided  into 
shares  of  equal  value.  The  most  commonly  accepted  value 
for  a  share  is  $100,  though  $1,  $10,  $25,  and  $50  shares 
are  found  in  many  industries.  In  some  states  the  law 
puts  limitations  upon  the  value  of  shares  that  are  to  be 
issued.  Some  stocks,  strange  as  it  may  seem,  have  no 
par  value.    The  Great  Northern  Ore  properties  were  di- 


78  Organizing  a  Business 

vided  into  1,500,000  trustees'  certificates  of  beneficial 
interest.  The  same  system  is  used  in  the  Chicago  Rail- 
ways Company.  Dividends  are  divided  at  so  much  a 
share  rather  than  a  percentage  upon  the  par  value  of  a 
share. 

A  share  of  stock  is  an  intangible  thing.  It  carries 
with  it  the  right  to  share  in  the  management,  earnings, 
and  assets  of  the  issuing  company.  Ownership  is  repre- 
sented by  certificates  of  stock.  A  stock  certificate  is 
merely  a  convenient  evidence  of  the  ownership  of  corpo- 
rate shares,  much  in  the  same  manner  as  a  deed  is  evi- 
dence to  the  ownership  of  land. 

COMMON  AND  PREFERRED  STOCK 

In  recent  years  the  practice  has  grown  up  of  dividing 
the  stock  into  two  classes  called  "common"  and  "pre- 
ferred." Preferred  stock  has  a  superior  claim  to  the 
dividends  or,  in  case  of  dissolution,  to  the  assets  of  a  cor- 
poration, or  both,  as  may  be  provided  in  the  charter. 
Preferred  stock  is  thus  an  intermediate  security  be- 
tween bonds  and  common  stock.  It  is  usually  granted 
dividends  up  to  a  certain  rate,  as,  for  example,  7  per 
cent.  If  the  corporation  earns  7  per  cent  in  excess  of 
all  other  expenses  upon  the  preferred  stock  only,  then 
the  holders  of  the  preferred  stock  may  receive  the  full 
amount  of  their  dividends,  while  the  common  stockhold- 
ers would  receive  no  dividends  at  all. 

Preferred  stock  may  be  either  cumulative  or  non- 
cumulative.  Wherever  preferred  stock  is  made  cumula- 
tive, all  the  dividends  up  to  a  specified  rate  become  a  pre- 
ferred charge  upon  the  earnings  and  accumulate  from 
year  to  year,  in  case  they  are  not  paid,  to  the  credit  of 
the  preferred  stockholders.  Hence  if  a  corporation  is 
unable  to  earn  the  rate  specified  on  the  preferred  stock, 


Formation  of  Corporations  79 

through  a  period  of  several  years,  and  then,  owing  to  im- 
proved conditions,  it  increases  its  earning  power  suf- 
ficiently to  accumulate  a  surplus  larger  than  is  required 
to  pay  the  preferred  dividend  of  that  year,  the  excess 
earnings,  after  the  preferred  dividend  of  that  year  is 
paid,  must  go  to  make  up  the  dividends  due  the  preferred 
stock  in  past  years,  which  have  been  withheld  owing  to  a 
lack  of  earnings.  Only  after  all  past  due  dividends  on 
the  preferred  stock  have  been  thus  paid  may  any  divi- 
dends be  declared  on  the  common  stock. 

Preferred  stock  often  has  the  right  to  share  with  the 
common  stock  all  profits  beyond  a  certain  amount.  In 
such  cases  it  is  usual  to  provide  that  the  preferred  stock 
shall  be  entitled  to  a  certain  rate,  usually  7  per  cent ;  then 
out  of  the  excess  earnings  the  common  stock  shall  be 
entitled  to  a  similar  amount,  and  the  two  classes  of  stock 
shall  then  share  equally  in  the  excess  profits. 

Preferred  stock  is  sometimes  issued,  in  which  the  hold- 
ers have  the  right  to  elect  a  majority  of  the  directors, 
while  the  common  stockholders  elect  the  minority.  In 
such  cases  the  real  control  of  the  corporation  is  by  its 
charter  entrusted  to  the  preferred  stockholders,  permit- 
ting the  common  stockholders,  however,  a  minority  rep- 
resentation upon  the  board.  Ordinarily  preferred  stock- 
holders have  one  vote  for  one  share,  in  common  with  all 
shareholders.  Sometimes  preferred  stockholders  have 
no  voting  rights  so  long  as  the  dividends  specified  in 
their  stock  are  regularly  paid ;  but  if,  for  any  reason,  the 
directors  representing  the  common  stock  are  unable  to 
pay  such  dividends,  then  automatically  the  election  of  di- 
rectors passes  over  into  the  hands  of  the  preferred  stock- 
holders and  remains  in  their  power  until  the  dividends 
upon  the  preferred  stock  have  been  paid  regularly  for 
the  period  of  time  specified  in  the  charter. 


80  Organizing  a  Business 

Preferred  stock  is  sometimes  further  divided  into 
classes,  as,  for  example,  first  preferred  and  second  pre- 
ferred. In  such  cases  the  first  preferred  shares  have  prior 
rights  over  the  second  preferred  and  usually  are  granted 
a  lower  rate  of  dividends,  on  account  of  the  fact  that 
they  have  the  first  right  to  dividends  and  the  first  right 
to  a  share  in  the  assets  in  case  the  corporation  is  dis- 
solved. 

Thus  where  a  corporation  is  organized  with  bonds  and 
two  classes  of  preferred  stock,  the  security  holders  are 
divided  into  four  classes,  each  having  its  own  special 
rights  and  privileges,  as  provided  in  the  charter  and  by- 
laws, the  bonds  taking  precedence  over  the  first  preferred 
stock  in  point  of  security,  but  ordinarily  having  no  rights 
in  management,  the  common  stock  taking  precedence 
over  all  the  other  securities  in  the  right  of  management, 
but  coming  after  all  the  others  in  its  right  to  share  in  the 
earnings  and  the  assets. 

Where  preferred  stock  is  issued  it  is  desirable  to  make 
the  bond  issue  relatively  small  and  thus  make  the  pre- 
ferred stock  take  the  place  of  certain  of  the  bonds  of  a 
less  desirable  character,  giving  them  at  the  same  time 
the  right  to  vote  for  the  directors.  Preferred  stock  re- 
sembles very  closely  the  income  bond  with  voting  power, 
especially  where  the  stock  possesses  cumulative  rights. 
Under  any  circumstances,  the  total  amount  of  preferred 
stock  plus  the  bonds  ought  not  to  exceed  the  value  of 
the  tangible  assets.  Consequently  the  larger  the  bond 
issue,  the  less  the  preferred  stock,  and  the  less  the  bond 
issue  the  larger  the  amount  of  preferred  stock  which  may 
be  properly  issued.  Under  such  circumstances  the  pre- 
ferred stock  becomes  a  high-class  security,  giving  a  fair- 
ly large  rate  of  earning  and  permitting  the  holders  to 
take  part  in  the  election  of  directors.     Such  securities 


Formation  of  Corporations  81 

are  dependent  upon  the  earning  power  of  the  corpora- 
tion for  their  dividends  and  therefore  must  always  par- 
take more  or  less  of  the  speculative  characteristics. 

Wherever  bonds  and  preferred  stock  have  been  issued, 
the  common  stock  represents  a  contingent  interest  in  the 
corporation,  and  the  holders  of  such  securities  are  in  a 
position  to  receive  all  of  the  profits  over  and  above  what 
is  necessary  to  pay  interest  on  the  bonds  and  the  speci- 
fied rate  of  interest  upon  the  preferred  stock.  If  the 
earnings  of  the  corporation  are  small,  the  preferred 
stockholders  are  unable  to  receive  their  full  rate  of  the 
dividends  and  in  certain  cases  may  receive  no  dividends 
at  all.  If  the  earnings  are  large,  the  preferred  stock- 
holders can  receive  under  any  circumstances  only  the 
specified  rate,  and  all  the  excess  earnings  go  to  the  com- 
mon stockholders. 

Consequently  the  amount  of  common  stock  issued  is 
not  a  matter  of  great  economic  importance.  The  value 
of  the  common  stock  must,  of  course,  equal  the  total  as- 
sets less  the  amount  of  preferred  stock,  the  bonds,  and 
other  prior  obligations.  This  is  best  shown  by  the  fol- 
lowing balance  sheet: 

Balance  Sheet — Corporation  A 

Assets  Liabilities 

Plant,  machinery,  etc.  .  .$10,000,000      Accounts    $  1,000,000 

Bonds    4,000,000 

Preferred  stock 3,000,000 

Common  stock 2,000,000 

$10,000,000  $10,000,000 

The  $2,000,000,  which  is  the  value  of  the  common  stock, 
may  be  represented  either  by  20,000  shares  at  $100  each 
or  by  2,000,000  shares  at  one  dollar  each.  To  represent 
the  $2,000,000  worth  of  common  stock  it  is  also  possible 


82  Organizing  a  Business 

to  issue  100,000  shares  and  call  each  share  worth  $100. 
In  such  a  case  the  par  value  of  the  stock  would  be  $100. 
Its  value,  however,  determined  from  the  assets,  is  only 
$20  per  share,  and  in  a  market  where  values  were  prop- 
erly adjusted  it  would  be  selling  at  about  that  figure. 
This  process  of  inflating  the  common  stock  issue  may 
have  any  one  or  all  of  the  following  results :  First,  it 
may  deceive  prospective  purchasers  as  to  the  real  value 
of  the  property.  In  drawing  up  a  balance  sheet  it  is  un- 
usual to  disclose  the  real  facts  and  place  the  common 
stock  at  $20  per  share.  The  common  practice  is  to  list 
the  common  stock  at  its  full  value  and  inflate  the  asset 
account  by  a  fictitious  entry  in  order  to  make  the  ac- 
counts balance.  This  is  represented  in  the  following- 
balance  sheet: 

Balance  Sheet — Corporation  B 

Assets  Liabilities 

Plant,    machinery $10,000,000      Accounts     $  1,000,000 

Good-will    8,000,000      Bonds    4,000,000 

Preferred  stock 3,000,000 

Common    stock     (100,000 

shares  @  $100) 10,000,000 

$18,000,000  $18,000,000 


Instead  of  inserting  the  amount  under  its  own  title  as 
above,  under  the  heading  of  " Good-Will,"  it  is  also  com- 
mon to  include  the  amount  with  the  plant  and  machinery 
and  call  the  whole,  ' '  Plant,  machinery,  etc, ' '  as  shown  in 
the  following: 

Balance  Sheet — Corporation  C 

Assets  Liabilities 

Plant,   machinery,  etc. .  .$18,000,000      Accounts  $  1,000,000 

Bonds    4,000,000 

Preferred   stock    3,000,000 

Common    stock     (100,000 

shares  @  $100) 10.000.000 

$18,000,000  $18,000,000 


Formation  of  Corporations  83 

The  proper  method  of  stating  the  condition  is  to  show 
the  stock,  bonds,  etc.,  at  their  full  value,  and  list  all  the 
assets  at  their  real  valuation,  and  if  the  assets  are  less 
than  the  liabilities,  insert  the  amount  under  the  title  of 
''Deficit,"  showing  the  exact  status.  This  is  shown  in 
the  following: 

Balance  Sheet — Corporation  D 

Assets  Liabilities 

Plant,   machinery    $10,000,000      Accounts     $1,000,000 

Deficit   8,000,000      Bonds    4,000,000 

Preferred  stock 3,000,000 

Common    stock     (100,000 

shares  @  $100) 10,000,000 

$18,000,000  $18,000,000 

If  the  assets  exceed  the  liabilities,  then  there  is  a  sur- 
plus which  belongs  to  the  stockholders  and,  under  ordi- 
nary circumstances,  to  the  common  stockholders.  This 
condition  is  shown  in  the  following: 

Balance  Sheet — Corporation  E 
Assets  Liabilities 

Plant,  machinery $10,000,000      Accounts   $  1,000,000 

Bonds    4,000,000 

Preferred  stock 3,000,000 

Common     stock      (10,000 

shares  @  $100) 1,000,000 

Surplus   1,000,000 

$10,000,000  $10,000,000 

It  will  be  seen  from  the  above  that,  while  the  par  value 
of  the  stock  issued  has  no  effect  upon  the  assets  of  the 
company  and  therefore  none  upon  the  real  value  of  the 
stock,  it  is  likely  that  the  issuing  of  stock  in  excess  of  the 
assets  may  lead  directors  to  adopt  the  policy  of  inflating 
the  assets  and  thus  deceive  prospective  investors  who 
have  no  means  of  knowing  the  real  condition  of  affairs 


84  Organizing  a  Business 

and  unwisely  estimate  the  value  of  the  stock  from  the  re- 
ports of  the  company. 

In  the  second  place,  those  in  active  charge  of  the  ac- 
counts of  the  corporation  may  deceive  the  other  stock- 
holders of  the  company  in  exactly  the  same  way.  Those 
in  actual  control,  however,  knowing  the  true  condition  of 
affairs,  are  in  a  position  to  take  advantage  of  the  decep- 
tion practiced  upon  the  other  stockholders,  and  thus  by 
the  purchase  and  sale  of  stock,  add  to  their  own  income 
at  the  expense  of  their  fellow  members  within  the  cor- 
poration. 

TEEASUKY  STOCK 

Treasury  stock  is  stock  which  has  come  back  as  the 
property  of  the  corporation  by  gift,  forfeiture,  purchase, 
or  some  other  process.  While  held  as  treasury  stock 
such  stock  is  not  usually  entitled  to  dividends  or  voting 
privileges.  If  it  was  originally  issued  as  full  paid,  it 
may  now  be  disposed  of  by  the  corporation  as  full  paid 
at  less  than  par.  Such  stock  does  not  change  its  char- 
acter as  full  paid  and  as  issued  stock,  though  it  is  not 
"outstanding." 

Treasury  stock  is  frequently  used  for  the  purpose  of 
raising  working  capital.  This  is  especially  true  in  the 
promotion  of  mining  property.  Certain  persons  will  or- 
ganize a  mining  corporation  and  accept  the  shares  of  the 
corporation  in  payment  of  services,  property,  etc  Then, 
each  person  will  donate  a  fraction  of  his  stock  to  the  cor- 
poration as  treasury  stock.  This  stock  will  then  be  sold 
at  such  figures  as  to  realize  the  largest  returns  for  the 
purpose  of  raising  the  working  capital. 

ISSUED  AND  UNISSUED  STOCK 

Treasury  stock  should  be  distinguished  from  unissued 
stock.    The  latter  is  stock  which  has  been  authorized  by 


Formation  of  Corporations  85 

the  charter,  but  which  has  not  been  subscribed  for.  It 
has  no  intrinsic  value,  but  exists  only  as  a  potential 
source  of  funds.  Corporations  are  frequently  capital- 
ized at  a  higher  figure  than  the  immediate  needs  for  capi- 
tal demand.  As  more  capital  is  required  for  expansion 
it  may  be  issued  without  amendment  of  the  charter. 
When  stock  has  once  been  issued  it  can  never  become 
unissued  stock  again.  Issued  stock  represents  a  liability 
of  the  corporation  and  the  cash,  property,  or  other  value 
acquired  by  means  of  a  stock  issue  are  regarded  as  an 
equivalent  asset. 

FULL  PAID  AND  NON-ASSESSABLE  STOCK 

A  corporation  is  founded  upon  the  theory  that  each 
share  of  stock  has  been  paid  for  in  full  in  cash  or  its 
equivalent.  Consequently  if  the  corporation  has  been 
properly  organized,  each  share  of  stock  as  delivered  has 
behind  it  its  full  value  in  real  property.  Upon  this  theory 
the  principle  of  limited  liability  is  founded  and  justified. 
Each  stockholder  may  lose  all  of  his  investment,  but  may 
not  be  called  upon  to  contribute  anything  in  addition  to 
satisfy  the  claims  of  creditors.  Where  stock  has  been 
sold  at  a  discount,  obviously  the  assets  are  less  than  the 
face  value  of  the  stock,  and  in  case  of  bankruptcy,  the 
creditors,  not  having  the  right  to  demand  satisfaction 
from  the  individual  stockholders,  must  rely  upon  the  real 
assets  of  the  company. 

Where  the  assets  are  less  than  appears  from  their  face, 
the  creditors  in  many  cases  receive  only  a  small  per- 
centage of  the  face  value  of  their  claims.  Under  such 
circumstances,  when  a  corporation  becomes  bankrupt,  as 
corporations  sometimes  do,  the  courts  have  held  that 
those  stockholders  who  have  not  paid  in  full  for  their 
stock  must  do  so  in  order  to  satisfy  the  claims  of  the 


86  Organizing  a  Business 

creditors;  that  is,  they  must  pay  up  the  balance  upon 
their  stock,  making  it  in  reality  full-paid.  Stock  is  or- 
dinarily issued  as  full-paid  and  non-assessable.  Such 
stock  is  often  sold  at  one-quarter  or  even  a  less  part  of 
its  face  value.  Under  such  circumstances,  the  majority 
of  the  stockholders  cannot  by  vote  assess  the  stock  in 
the  corporation. 

Where  a  corporation  becomes  bankrupt,  however,  and 
it  is  found  that  the  stock  was  wholly  or  partially  given 
away,  it  is  entirely  proper  that  the  courts  should  assess 
the  stockholders  for  their  unpaid  portion  of  the  stock. 
Under  such  circumstances  the  liability  of  the  stockholder 
is  limited  to  the  face  value  of  his  stock ;  but  on  the  other 
hand,  it  is  equal  to  the  face  value  of  the  same.  The 
method  which  has  been  practiced  so  much  in  the  last  few 
years  of  giving  the  common  stock  as  a  bonus  with  the 
issues  of  preferred  stock  has  tended  to  make  the  prin- 
ciple of  limited  liability  a  means  by  which  honest  credi- 
tors have  been  cheated  out  of  their  rights. 

Registrars  and  Transfer  Agents 

Registrars  and  transfer  agents  are  so  commonly  asso- 
ciated with  the  formation  and  promotion  of  corporations 
that  their  functions  should  be  briefly  described  in  this 
connection.  Corporations  at  the  present  time  usually  en- 
deavor to  reassure  the  public  of  the  value  of  their  se- 
curities by  appointing  reputable  trust  companies  to  act 
as  registrars  and  transfer  agents  for  their  stock.  The 
use  of  a  well-known  and  reputable  trust  company  in  this 
connection  guarantees  that  the  stock  issued1  is  regular, 
that  the  reputations  of  the  directors  and  the  managers 
of  the  corporation  are  good,  and  that,  in  general,  finan- 
cial experts  are  willing  to  back  the  enterprise.  Most  of 
the  large  stock  exchanges,  including  the  New  York  ex- 


Formation  of  Corporations  87 

change,  will  not  list  the  stock  of  a  corporation  unless  it 
has  been  signed  by  a  trust  company  or  other  reputable 
financial  agency  as  registrar.  The  employment,  there- 
fore, of  these  agencies  greatly  facilitates  the  marketing 
of  stock  for  business  enterprises.  It  is  evident,  of  course, 
that  the  better  the  reputation  of  the  trust  company,  the 
greater  the  advantage  from  such  registration. 

It  is  desirable  that  the  duties  of  these  officers  and  their 
relation  to  the  corporation  be  very  clearly  defined.  The 
relationship  of  principal  and  agent  exists  between  the 
corporation  and  these  agents  and,  for  the  purpose  of 
definitely  fixing  responsibility,  all  corporations  should 
define  this  relationship  in  unequivocally  clear  terms. 
The  specific  duty  of  the  transfer  agent  is  to  make  the 
transfers  of  the  stock  of  a  corporation  and  to  satisfy 
himself  of  their  regularity  and  freedom  from  fraud. 
The  registrar  signs  the  new  certificates  of  stock  pre- 
sented by  the  transfer  agent  as  evidence  that  everything 
has  been  transacted  in  regular  order. 

This  relationship  between  the  transfer  agent  and  the 
registrar  is  such  that  the  two  agencies  should  be  abso- 
lutely separate  and  independent  of  each  other  in  order 
to  secure  the  fullest  degree  of  responsibility.  Unless 
such  independent  relationship  exists  and  unless  the  reg- 
istrar is  presented  with  definite  evidence  in  each  case 
of  the  legality  and  regularity  of  an  issue,  the  advantage 
which  clearly  exists  in  the  use  of  such  agents  may  be 
largely  lost. 

The  Books  of  a  Corporation 

In  addition  to  the  ordinary  accounting  books,  which,  of 
course,  vary  according  to  the  nature  of  a  business,  the 
following  auxiliary  books  are  used  to  record  properly 
the  transactions  of  a  corporation: 


88  Organising  a  Business 

1.  Minute  book 

2.  Subscription  book 

3.  Installment  book 

4.  Installment  scrip  book 

5.  Stock  certificate  book 

6.  Stock  ledger 

7.  Stock  transfer  book 

8.  Dividend  book 

The  minute  book  of  a  corporation  contains  a  record  of 
what  is  done  at  the  meetings  of  the  stockholders  and  of 
the  board  of  directors,  although  in  some  cases  separate 
books  are  kept  for  the  meetings  of  each.  The  minute 
book  is  ordinarily  a  simple  blank  record  book.  A  copy  of 
the  company's  charter  or  certificate  of  incorporation  is 
usually  entered  on  the  first  pages.  Then  come  the  by- 
laws of  the  company.  These  documents  are  either  tran- 
scribed into  the  book  and  certified  as  to  their  accuracy 
or  else  are  pasted  in  from  printed  copies.  The  minute 
book  is  usually  kept  by  the  secretary  of  the  corporation. 

The  record  should  be  as  concise  and  accurate  as  pos- 
sible and  all  motions  should  be  so  worded  as  to  avoid  am- 
biguity or  misinterpretation,  since  the  minutes  are  the 
legal  evidence  of  the  proceedings  of  the  meetings  and  for 
all  actions  taken  thereat. 

The  subscription  book  is  used  to  record  the  subscrip- 
tions of  stockholders.  It  serves  as  a  contract  with  the 
subscribers  for  the  amount  of  stock  for  which  each  has 
subscribed.  The  book  should  contain  the  name  of  each 
subscriber,  his  address,  the  number  of  shares  which  he 
agrees  to  take,  and  the  date  of  the  subscription.  It 
usually  consists  of  nothing  more  than  the  ordinary  sub- 
scription list. 

The  installment  book  records  the  payment  of  each  in- 
stallment due  on  subscriptions.    It  contains  the  name  of 


Formation  of  Corporations  89 

each  subscriber  with  the  amount  paid  on  each  install- 
ment. A  separate  record  is  kept  for  each  payment.  The 
first  column  contains  the  subscribers'  names  arranged 
alphabetically.  The  second  column  is  used  for  the  ledger 
folio.  The  third  column  contains  the  number  of  shares 
subscribed  for.  The  fourth  column  contains  the  amount 
of  the  installment.  The  fifth  column  contains  interest 
due  on  delinquent  payments.  The  sixth  column  contains 
the  amount  paid.  The  seventh  column  contains  the  date 
of  payment. 

The  installment  scrip  book  is  a  receipt  book  for  install- 
ments paid  by  stockholders.  The  scrip  or  certificates  of 
this  book  are  issued  as  installments  are  paid  and  the  stub 
is  retained  by  the  secretary  as  evidence  of  such  payment. 
When  all  the  installments  have  been  paid,  these  receipts 
are  surrendered  to  the  secretary  and  the  regular  stock 
certificates  are  issued  to  the  subscribers.  Needless  to 
say,  the  installment  book  and  the  installment  scrip  book 
are  used  only  when  stocks  are  to  be  paid  for  on  the  in- 
stallment plan. 

Stock  certificates  are  issued  from  the  stock  certificate 
book,  which  consists  of  blank  stock  certificates  numbered 
in  serial  order  and  each  with  its  corresponding  stub.  No 
new  certificates  should  be  issued  upon  any  shares  until 
the  old  certificate  has  been  surrendered  and  properly 
canceled.  In  smaller  corporations  the  stock  certificate 
book  is  frequently  the  only  stock  book  maintained. 

The  stock  ledger  or  stock  book  is  used  to  keep  an  ac- 
curate record  of  the  stockholders  and  the  stock  held  by 
each.  It  usually  shows  in  alphabetical  order  the  names 
and  addresses  of  stockholders  on  record,  the  amount  of 
stock  held,  from  whom  and  when  acquired,  and,  if  any 
of  the  stock  has  been  disposed  of,  to  whom  and  when. 


90  Organizing  a  Business 

Finally  it  shows  the  balance  of  stock  at  any  time  to  the 
credit  of  the  stockholder. 

The  transfer  book  contains  a  record  of  the  transfers 
of  stock  and  also  the  actual  instruments  of  assignment  by 
which  these  transfers  were  made.  The  transferee  or  his 
duly  authorized  agent  signs  for  the  transaction.  These 
items  are  then  posted  to  the  stock  ledger  and  form  the 
basis  of  the  entries  in  that  book.  A  form  of  assignment 
is  generally  printed  on  the  back  of  stock  certificates. 
The  transfer  books  are  usually  closed  to  transfers  a 
certain  number  of  days  before  the  annual  meeting  of 
stockholders  and  before  a  dividend  period.  This  is  to 
obviate  any  uncertainty  as  to  who  is  to  participate  in 
either. 

When  a  stock  certificate  has  been  transferred  by  en- 
dorsement, the  transferee  does  not  become  the  owner 
of  such  stock  in  the  eyes  of  the  corporation  until  the 
transfer  has  been  duly  recorded  upon  the  stock  books  of 
the  corporation.  Until  that  is  done  the  original  owner 
continues  to  be  the  owner  of  record  and  will  be  held  for 
stockholder's  liabilities  as  any  other  stockholder.  The 
original  owner's  right  to  dividends  is  qualified;  while 
he  receives  the  dividends  from  the  corporation  he  must 
account  to  the  person  possessing  the  duly  assigned  stock 
certificate  for  these  dividends.  He  also  has  recourse  to 
his  assignee  for  any  payments  he  may  be  compelled  to 
make  upon  this  stock. 

The  dividend  book  is  used  for  the  purpose  of  recording 
each  dividend  declared  and  paid.  It  contains  a  record  of 
each  dividend,  the  number  of  shares  held  by  each  stock- 
holder, the  amount  of  dividends  paid  thereon,  and  the 
signature  of  the  stockholder  as  a  receipt  for  his  dividend. 
In  many  corporations  dividend  checks  and  vouchers  take 
the  place  of  this  book. 


Formation  of  Corporations  91 

The  Corporation  Calendar 

The  calendar  of  a  corporation  is  a  book,  a  card,  or  mem- 
oranda used  as  a  reminder  of  those  formal  matters  of 
the  corporation's  business  that  must  be  attended  to  at 
regular  and  stated  times.  The  secretary  should  have  a 
system  for  calling  his  attention  automatically  to  formal 
matters  of  this  kind.  All  of  this  information  should  be 
arranged  in  chronological  order. 

Upon  such  a  calendar  should  be  recorded  matters  that 
pertain  to  the  regular  corporate  procedure — stockhold- 
ers' meetings,  notices  of  stockholders'  meetings,  direc- 
tors' meetings,  notices  of  directors'  meetings,  dividend 
notices,  close  of  transfer  books,  etc.;  matters  that  per- 
tain to  the  relationship  of  the  corporation  to  the  state — 
listing  property  for  city,  county,  state,  and  national  taxa- 
tion, franchise  taxes,  income  taxes,  dates  of  annual  and 
special  reports  to  the  different  departments,  branches, 
and  bureaus  of  local,  state,  and  national  government; 
and  memoranda  of  a  similar  nature  requiring  regular 
attention. 

In  order  to  prepare  such  a  calendar,  it  is  necessary  to 
consult  the  charter  and  by-laws  of  the  corporation,  mu- 
nicipal ordinances,  state  and  federal  laws,  the  rulings 
and  decisions  of  courts  and  administrative  bodies  affect- 
ing the  affairs  of  the  corporation,  and  similar  sources  of 
information.  A  serviceable  calendar  of  this  kind  is  the 
product  of  a  great  deal  of  thought  and  of  the  accumu- 
lated experiences  of  the  past  which  have  been  definitely 
preserved  in  written  records  for  this  use.  Space  should 
always  be  reserved  for  inserting  any  new  items  that  come 
to  the  attention  of  those  concerned. 


92  Organizing  a  Business 

The  form  of  such  a  calendar  may  be  somewhat  as 
outlined  in  the  following  illustration: 

Corporate  Calendar  op  the  Company 

1915 
January — 

2 — Directors'  meeting. 

5 — Close  transfer  books  for  annual  stockholders'  meeting  on 
January  30. 
10 — Notify  stockholders  of  annual  meeting  on  January  30. 
12 — Payment  of  quarterly  dividend. 
22 — Prepare  annual  report  for  the  State  Public  Utilities 

Commission  before  January  31. 
30 — Annual  meeting  of  stockholders. 

31 — Forward  annual  report  to  Public  Utilities  Commission. 
February — 

1 — Mail  notices  of  directors'  meeting  February  5. 
5 — Directors'  meeting. 
15 — Prepare  schedule  for  federal  income  tax ;  last  day  to  file 

March  1. 
20 — Prepare  for  listing  property  for  state  and  local  taxation 
March  1. 
March — 

1 — Last  day  for  listing  income  tax ;  list  state  and  local  taxes. 
2 — Mail  notices  of  directors'  meeting  on  March  6. 
6 — Directors'  meeting. 
31 — Mail  notices  of  directors'  meeting  on  April  4. 

April — 

4 — Directors'  meeting. 
11 — Payment  of  quarterly  dividend. 
21 — Taxes  must  be  paid  within  ten  days. 
May— 

1 — Last  day  for  paying  taxes. 
2 — Mail  notices  of  directors'  meeting  on  May  7. 
7 — Directors'  meeting. 
30 — Decoration  Day,  legal  holiday. 


Formation  of  Corporations  93 

June — 

1 — Mail  notices  of  directors'  meeting. 

5 — Directors'  meeting. 
10 — Board  of  Tax  Review  meets  June  20. 
20 — Meeting  of  Board  of  Tax  Review. 


Etc. 


TEST  QUESTIONS 


1.  What  functions  does  the  promoter  perform  in  the  organ- 
ization of  business  enterprises? 

2.  What  are  the  legal  responsibilities  of  a  promoter? 

3.  What  tests  would  you  apply  in  choosing  a  state  for  incor- 
poration? Why  would  you  be  exceedingly  careful  in  choosing  a 
so-called  "liberal"  state  for  this  purpose? 

4.  Upon  what  principles  would  you  determine  the  amount  of 
capitalization  ? 

5.  What  is  meant  by  a  share  of  stock  ?  a  stock  certificate  ? 

6.  What  is  the  distinction  between  common  and  preferred 
stock?  issued  and  unissued  stock? 

7.  What  is  ' '  watered ' '  stock  ?     AVhat  are  its  results  ? 

8.  What  is  meant  by  treasury  stock  ?    How  is  it  acquired  ? 

9.  When  is  stock  full-paid  and  non-assessable? 

10.  What  are  the  functions  of  a  registrar?  a  transfer  agent? 

11.  What  is  meant  by  each  of  the  following:  Minute  book, 
subscription  book,  installment  book,  installment  scrip  book,  stock 
certificate  book,  stockholder  stock  transfer  book,  dividend  book? 

12.  What  is  a  corporation  calendar  ?  Do  you  use  it  in  connec- 
tion with  your  own  business? 


CHAPTER  VI 
the  charter 

Its  Main  Features 

In  choosing  a  state  under  which  the  corporation  is  to  be 
formed,  the  promoters  at  the  same  time  determine  the 
fundamental  legal  conditions  under  which  the  corpora- 
tion is  to  operate.  The  general  corporation  act  in  each 
state  and  in  some  cases  the  state  constitutions  not  only 
formulate  the  more  important  of  these  conditions,  but 
universally  require  the  incorporators  to  draw  up  and 
adopt  a  formal  instrument  under  which  the  incorporators 
unite  to  form  the  corporation.  Such  an  instrument  is 
called  the  "charter"  or  " certificate  of  incorporation"  or 
sometimes  the  "articles  of  incorporation." 

The  charter  is  usually  drawn  up  by  the  original  pro- 
moters and  at  the  proper  time  is  presented  to  the  proper 
authorities  for  their  approval.  Wherever  charters  are 
granted  by  the  special  act  of  some  legislature  they  are 
likely  to  be  more  extensive  and  more  specific.  Wherever 
they  are  taken  out  under  a  general  corporation  act,  they 
are  often  comparatively  brief,  since  the  corporation  law 
outlines  many  conditions  that  would  otherwise  be  pro- 
vided for  in  the  charter.  In  all  cases  they  include  a 
brief  statement  on  at  least  the  following  points: 

1.  Name  of  the  corporation. 

2.  Objects  or  purposes  for  which  it  is  organized. 

3.  Amount  of  capital  stock,  classes  into  which  it  is 
divided,  and  the  rights  of  each  class. 

94 


The  Charter  95 

4.  The  number  of  shares  into  which  the  capital  stock 
is  divided  and  the  par  value  of  each. 

5.  The  location  of  its  principal  office. 

6.  The  term  for  which  it  is  formed,  either  for  a  period 
of  years  or  in  perpetuity. 

7.  The  names  and  post-office  addresses  of  the  incor- 
porators. 

8.  The  number  of  directors  and  often  the  names  of 
those  to  serve  the  first  year. 

NAME  OF  THE  CORPORATION 

The  choice  of  a  name  for  the  corporation  is  left  to  the 
incorporators  with  one  condition,  namely,  that  they  may 
not  select  a  name  already  in  use  by  a  corporation  of  the 
same  state  already  in  existence. 

It  is  desirable  to  select  a  name  that  indicates  the 
nature  of  the  business  which  the  corporation  is  to  under- 
take, as  The Motor  Car  Company,  The 

Carbide  Company.  In  some  cases  the  title  is  chosen  to 
perpetuate  the  name  of  some  man  who  has  become  dis- 
tinguished for  his  technical  or  business  ability,  as  the 
Westinghouse  Manufacturing  Company.  In  other  cases 
the  name  is  chosen  to  continue  the  name  of  a  partnership 
which  has  been  converted  into  a  corporation,  as  the 
Thompson-Houston  Company.  In  all  cases,  since  the 
name  may  become  an  asset  of  importance  as  the  reputa- 
tion of  the  corporation  becomes  established,  it  is  desir- 
able to  select  one  that  is  short  and  that  is  likely  to  call 
the  attention  of  those  who  see  it  to  the  business  which 
the  corporation  is  carrying  on. 

THE  OBJECT  OR  PURPOSE  OF  THE  CORPORATION 

While  the  individual  and  the  partnership  may  in  gen 
eral  undertake  any  business  not  forbidden  by  law,  thp 


96  Organizing  a  Business 

corporation  is  required  to  name  the  objects  for  which  it 
is  formed  and  confine  itself  rather  narrowly  to  the  objects 
or  purposes  specified  in  its  charter.  Hence  it  is  neces- 
sary to  state  such  objects  at  considerable  length.  When, 
however,  the  business  to  be  undertaken  is  fairly  limited 
in  its  character,  the  object  clause  may  be  comparatively 
brief.  The  following  is  a  good  illustration  of  the  object 
clause  of  a  manufacturing  company  formed  for  the  pur- 
pose of  making  a  particular  line  of  machinery. 

The  purposes  for  which  said  corporation  is  formed  are  as  fol- 
lows: 

1.  To  buy,  sell,  manufacture  and  generally  deal  in  all  manner 
of  tools,  machinery,  devices,  appliances  and  supplies  used  in  the 
cooper's  trade. 

2.  To  lease,  buy,  sell,  use  and  hold  all  such  property,  real  or 
personal,  as  may  be  necessary  or  convenient  in  connection  with 
the  said  business. 

3.  To  do  any  or  all  things  set  forth  in  this  certificate  as  objects, 
purposes,  powers  or  otherwise,  to  the  same  extent  and  as  fully 
as  natural  persons  might  do,  and  in  any  part  of  the  world.1 

In  cases  where  the  business  to  be  conducted  is  exten- 
sive, it  is  desirable  to  include  in  the  purposes  for  which 
the  corporation  is  formed  a  clause  sufficiently  broad 
that  the  legitimate  activities  of  the  corporation  may  not 
be  unduly  hampered.  For  example,  the  United  States 
Steel  Corporation  is  engaged  in  practically  all  kinds  of 
manufacturing  connected  with  the  iron  and  steel  in- 
dustry. In  order  that  it  might  be  authorized  to  conduct 
its  business  properly,  the  object  clause  in  its  charter  con- 
tains eleven  paragraphs,  each  of  which  is  a  grant  of  ex- 
tensive powers  in  itself.  At  the  end  of  the  last  clause,  for 
fear  some  of  its  proposed  activities  might  be  prevented 
for  lack  of  authority,  the  following  paragraph  is  added : 

i  Conyngton,  Corporation  Management,  page  170. 


The  Charter  97 

To  do  any  and  all  other  acts  and  things  and  to  exercise  any  and 
all  other  powers  which  a  copartnership  or  natural  person  could 
do  and  exercise  and  which  now  or  hereafter  may  be  authorized 
by  law.2 

THE  CAPITAL   STOCK 

The  provisions  in  regard  to  the  capital  stock  may  be 
exceedingly  brief  or  they  may  be  treated  at  considerable 
length  in  the  charter.  In  the  former  case  the  detailed 
specifications  are  reserved  for  the  by-laws.  Where  a 
corporation  is  essentially  private  in  its  nature,  that  is, 
where  practically  all  its  stockholders  are  directly  inter- 
ested in  its  management,  it  is  proper  to  make  the  clause 
relating  to  the  capital  stock  brief,  specifying  merely  the 
amount  authorized,  the  number  of  shares,  and  the  par 
value  of  each. 

In  cases  where  the  corporation  is  composed  of  a  large 
number  of  widely  scattered  stockholders,  the  clauses  re- 
lating to  the  capital  stock  should  be  full  and  explicit. 
That  of  the  United  States  Steel  Corporation,  for  ex- 
ample, not  only  includes  all  of  the  usual  provisions,  but 
contains  elaborate  regulations  in  regard  to  the  payment 
of  dividends  and  the  distribution  of  the  assets  in  case  the 
corporation  is  dissolved.  The  chief  object  in  stating  the 
rights  of  the  stockholders  in  the  charter  rather  than  in 
the  by-laws  is  to  prevent  the  majority  interests  from  un- 
duly interfering  with  the  rights  of  the  minority. 

It  is  usual  to  provide  that  the  charter  may  be  amended 
only  with  the  consent  of  a  two-thirds  or  a  three-fourths 
majority,  whereas  the  by-laws  can  ordinarily  be  altered 
by  a  bare  majority  and  sometimes  even  by  a  vote  of  the 
directors.  Consequently  the  rights  formulated  in  the 
charter  are  likely  to  be  less  easily  changed  and  thus  more 
permanent. 

2  Charter  of  United  States  Steel  Corporation,  Section  III. 


98  Organizing  a  Business 

OTHER  ESSENTIAL  FEATURES 

The  location  of  the  principal  offices  and  the  names  and 
addresses  of  the  incorporators  and  directors  are  required 
by  the  statute  law  quite  generally  in  order  that  processes 
may  be  served  and  that  those  responsible  for  the  promo- 
tion of  the  enterprise  may  be  held  accountable  to  the 
proper  state  officers  for  any  breach  of  the  law.  The  loca- 
tion of  the  principal  office  does  not  necessarily  mean  the 
chief  operating  office.  Jersey  City,  for  example,  contains 
the  domicile  of  a  large  number  of  New  Jersey  corpora- 
tions whose  principal  places  of  manufacturing  are  in 
Pittsburg  and  Chicago,  and  the  incorporators  may  be,  and 
often  are,  succeeded  by  the  real  power  behind  the  throne, 
as  in  the  case  of  the  United  States  Shipbuilding  Com- 
pany, as  soon  as  the  preliminary  stages  in  the  organiza- 
tion are  concluded. 

Some  states  permit  corporations  to  be  incorporated  in 
perpetuity ;  others  for  a  limited  term  only.  In  the  latter 
case  provision  is  usually  made  in  the  corporation  act  for 
a  continuation  of  the  corporate  existence  of  the  enter- 
prise at  the  expiration  of  the  term  for  which  it  is  formed, 
by  some  formal  action  on  the  part  of  the  stockholders. 

In  the  celebrated  case  of  Dartmouth  College  v.  the 
State  of  New  Hampshire,  decided  in  1818,  a  charter  was 
held  to  be  a  contract  between  the  state  granting  it  and  the 
incorporators  and  their  legal  successors.  Hence  a 
charter  granted  in  perpetuity  cannot  be  terminated  by 
action  of  the  state.  Accordingly  certain  charters  granted 
in  the  early  part  of  the  last  century,  possessing  wide  pow- 
ers of  doing  business,  have  become  exceedingly  valuable, 
and  some  of  these  have  been  obtained  and  used  for  pur- 
poses quite  different  from  those  for  which  they  were 
originally  obtained.  As  a  result  of  the  decision  of  the 
Supreme  Court  in  the  Dartmouth  College  case,  legisla- 


The  Charter  99 

tures  of  the  various  states,  in  granting  special  charters 
and  in  their  laws  for  the  incorporation  of  companies  un- 
der general  acts,  have  quite  generally  provided  that  such 
charters  may  be  terminated  by  the  legislatures  whenever 
in  the  opinion  of  such  authority  the  public  interests  seem 
to  make  such  action  desirable. 

In  addition  to  the  above  clauses,  which  are  called  the 
essential  features  of  a  corporate  charter,  it  is  common  in 
the  larger  corporations  to  insert  paragraphs  regulating, 
and  sometimes  limiting,  the  powers  of  the  directorate.  It 
is,  for  example,  not  unusual  to  specify  the  number  of 
directors  and  to  provide  for  their  classification  into 
groups,  each  group  serving  for  a  period  of  years ;  to  regu- 
late the  method  of  electing  officers  and  filling  vacancies; 
to  authorize  the  appointment  of  committees  and  fix  their 
duties ;  to  allow  the  directors  to  fix  the  working  capital ; 
to  use  the  earnings  in  declaring  dividends  or  for  improv- 
ing the  property,  as  their  judgment  directs ;  to  authorize 
the  corporation  to  hold  stock  in  other  corporations;  and 
to  require  that  bonds  or  mortgages  constituting  a  prior 
obligation  upon  any  particular  class  of  securities  in  exist- 
ence must  be  approved  by  a  specified  majority  of  the 
votes  of  the  various  classes  affected,  before  such  change 
may  go  into  effect. 

The  charter  thus  formulates  the  fundamental  prin- 
ciples upon  which  a  corporation  is  organized.  In  all 
cases  it  is,  however,  subordinate  to  the  corporation  law 
of  the  state  under  which  the  company  is  incorporated. 
Its  provisions  serve  to  carry  out  and  extend  the  provi- 
sions of  the  corporation  law  rather  than  to  limit  or 
change  them. 


100  Organizing  a  Business 

TEST  QUESTIONS 

1.  "What  is  meant  by  the  charter  of  a  corporation  ? 

2.  What  are  the  eight  main  divisions  of  a  charter? 

3.  Why  is  it  important  to  be  very  particular  about  the  state- 
ment of  the  object  and  purpose  of  the  corporation?  Have  you 
consulted  the  forms  at  the  close  of  this  book  in  regard  to  the  object 
clauses  ? 

4.  What  is  the  value  of  general  words  following  a  specific  enu- 
meration of  powers  in  an  object  class? 

5.  What  factors  should  you  bear  in  mind  in  choosing  the  name 
of  a  corporation  ? 

6.  What  point  did  the  Dartmouth  College  case  decide  with 
respect  to  the  charter  of  a  corporation? 

7.  How  do  the  anti-trust  laws  of  the  federal  government  and 
of  the  several  states  affect  the  charter  powers  of  a  corporation  ? 


CHAPTER  VII 
the  by-laws 

Theik  Essential  Features 

The  charter  is  expected  to  provide  for  those  features 
in  a  corporate  organization  which,  by  their  nature,  are  in- 
tended to  be  fairly  permanent.  It  is  formulated  at  the 
beginning  of  the  corporate  existence  of  the  enterprise 
and  is  ordinarily  difficult  of  amendment. 

The  by-laws,  on  the  contrary,  are  designed  to  provide 
the  regulations  under  which  the  corporation  is  managed. 
The  charter  thus  may  be  compared  to  the  constitution  of 
a  state,  while  the  by-laws  resemble  the  statute  law.  The 
by-laws  are  always  subordinate  to  the  charter  provisions 
and  should  be  considered  as  a  supplement  to  that  docu- 
ment. If  the  charter  is  full  and  explicit  upon  any  point, 
that  topic  may  be  omitted  in  the  by-laws.  If  the  charter 
fails  to  make  provision  for  any  feature  essential  to  the 
proper  organization  and  conduct  of  the  corporation,  such 
feature  should  be  covered  by  the  by-laws.  In  general, 
the  by-laws  provide  fairly  specific  rules  and  regulations 
in  regard  to  the  following  subjects : 


1. 

The  stock 

2. 

The  stockholders 

3. 

The  directors 

4. 

The  officers 

5. 

The  dividends  and  finances 

6. 

The  amendments 

THE  STOCK 

It  is  usual  to  provide  in  the  by-laws  that  certificates  of 
stock  shall  be  issued  to  the  stockholders  and  to  require 

101 


102  Organizing  a  Business 

that  such  documents  be  signed  by  the  president  and  treas- 
urer and  sealed  by  the  secretary  with  the  corporate  seal ; 
that  a  complete  record  of  the  issue  of  such  certificates 
shall  be  kept  and  that  transfers  of  stock  shall  be  made 
only  on  the  books  of  the  company;  that  old  certificates 
must  be  surrendered  and  cancelled  before  new  ones  are 
issued  to  take  their  place.  It  is  also  usual  to  require  the 
stock  book  to  be  closed  for  a  short  period,  for  example, 
twenty  days,  before  the  general  elections  and  for  a 
shorter  period  before  dividend  days.  It  is  also  desirable 
to  make  provisions  concerning  treasury  stock  and  usually 
directors  are  forbidden  to  vote  or  pay  dividends  on  such 
shares. 

The  object  of  the  stock  provisions  in  the  by-laws  is  to 
enable  the  management  and  stockholders  to  know  who 
hold  the  various  shares  of  stock,  in  order  that  notices  of 
meetings  may  be  sent  or  in  order  that  proposed  plans  of 
corporate  policy  may  be  presented  to  them  before  the 
meetings  are  called;  to  prevent  fraudulent  issue  of  cer- 
tificates and  to  lessen  the  speculative  purchases  of  stock 
just  before  dividend  days ;  and  finally,  to  make  it  difficult 
to  control  the  election  of  directors  by  purchasing  stock 
immediately  before  election,  holding  it  for  purposes  of 
voting  upon  it  during  the  election,  and,  when  the  election 
is  over,  selling  the  same. 

THE   STOCKHOLDERS 

The  time  and  place  of  the  annual  meeting  is  always 
provided  for  in  the  by-laws,  and  it  is  also  customary  to 
specify  that  a  notice  of  such  meeting  shall  be  sent  by  the 
secretary  to  each  member  a  sufficient  time  in  advance  to 
give  all  stockholders  an  opportunity  to  attend  the  meet- 
ing if  they  so  desire.  The  election  of  directors  and  the 
reports  of  officers  are  usually  required  at  the  annual 


The  By-Laws  103 

meeting.  It  is  usual  by  statute  law  to  allow  voting  by 
proxy;  wherever  such  is  not  the  case  it  is  conimon  to 
authorize  this  method  of  voting  in  the  by-laws.  Special 
meetings  of  the  stockholders  are  also  provided  for  under 
this  section.  Such  meetings  may  be  called  ordinarily 
either  by  a  resolution  of  the  board  of  directors  or  on 
request  of  a  representative  number  of  the  stockholders. 
In  addition  to  this  the  number  required  for  a  quorum  is 
stated  and  the  order  of  business  which  is  followed  in  the 
various  meetings  is  outlined. 

THE   DIRECTORS 

The  corporation  law  of  all  the  states  requires  that  the 
business  of  the  corporation  shall  be  managed  by  a  board 
of  directors.  In  the  by-laws  the  number  of  such  directors 
is  fixed,  if  not  already  provided  for  in  the  charter,  and  in 
addition,  their  qualifications,  method  of  election,  term  of 
office,  and  method  of  filling  vacancies  are  stated.  It  is 
also  customary  to  require  regular  meetings  of  the  board 
and  to  provide  for  special  meetings  whenever  the  busi- 
ness of  the  corporation  requires.  In  this  section  the 
quorum  is  stated  and  the  method  of  electing  officers  is 
given  in  detail.  In  the  larger  corporations  the  board  of 
directors  is  authorized  to  appoint  various  committees  to 
take  charge  of  the  business  of  the  board  while  the  board 
is  not  in  session.  For  example,  the  United  States  Steel 
Corporation  originally  had  two  such  standing  com- 
mittees— the  executive  committee  and  the  finance  com- 
mittee. These  committees  prepare  plans  for  the  consid- 
eration of  the  full  board  and  oversee  the  execution  of 
such  plans  after  they  are  adopted.  The  committee  sys- 
tem is  an  essential  feature  of  corporate  organization  for 
those  corporations  having  a  large  number  of  directors 


10-4  Organizing  a  Business 

and  for  those  where  the  directors  live  at  a  considerable 
distance  from  each  other. 

THE  OFFICERS 

The  corporation  acts  of  the  various  states  generally 
require  that  the  following  officers  shall  be  elected,  namely, 
a  president,  a  secretary,  and  a  treasurer.  It  is  usual  to 
provide  that  such  officers  may  be  chosen  by  the  directors 
or  by  the  stockholders,  as  the  by-laws  direct.  The  presi- 
dent must  ordinarily  be  a  director;  the  other  officers  may 
or  may  not  be  directors.  The  corporation  act  also  pro- 
vides that  such  other  officers  may  be  chosen  as  the  by- 
laws specify.  Consequently  it  is  necessary  to  provide  in 
the  by-laws  for  the  complete  official  organization  of  the 
corporation,  to  determine  the  method  by  which  the  offi- 
cers shall  be  elected,  and  to  give  an  outline  at  least  of  the 
duties  of  the  official  staff. 

In  addition  to  the  officers  which  are  required  by  law,  it 
is  common  in  the  larger  corporations  to  appoint  one  or 
more  vice-presidents,  a  general  manager,  and  a  chief 
counsel.  Where  one  vice-president  only  is  appointed, 
such  officer  generally  acts  as  an  assistant  to  the  president. 
Where  several  are  appointed,  it  is  common  to  divide  the 
work  of  the  corporation  into  departments  and  give  each 
vice-president  general  supervision  over  one  of  these. 
The  president  in  such  cases  becomes  the  general  super- 
vising officer,  but  without  specific  duties  in  any  depart- 
ment. The  president,  as  the  name  signifies,  is  ordinarily 
the  chief  officer  of  both  the  stockholders  and  the  directors. 
His  duties  as  outlined  in  the  by-laws  are  to  preside  at  all 
the  meetings  of  both  these  organizations  when  he  is  able 
to  be  present.  He  is  generally  authorized  also  to  sign  all 
stock  certificates,  all  important  contracts,  all  deeds,  and 
such  other  papers  as  are  deemed  of  sufficient  importance 


The  By-Laws  105 

to  need  the  approval  of  the  chief  executive.  It  is  cus- 
tomary also  to  provide  in  the  by-laws  that  he  shall  make 
a  complete  annual  report  to  the  directors  and  present  the 
same  at  the  annual  meeting  of  the  stockholders.  He  is 
usually  made,  ex  officio,  a  member  of  all  important  com- 
mittees and  is  ordinarily  the  chief  executive  officer  for  the 
entire  corporation. 

Some  of  the  larger  corporations  have  introduced  a  new 
officer  called  the  ''chairman  of  the  board,"  and  assign  to 
him  a  portion  of  the  president's  duties.  The  chairman  of 
the  board  presides  at  the  meetings  of  the  board  of  direc- 
tors, while  the  president  retains  his  former  place  as 
presiding  officer  at  the  stockholders'  meetings.  The 
chairman  thus  takes  on  the  more  important  and  more 
dignified  duties  of  the  president,  and  as  a  matter  of  fact 
is  usually  a  former  president  who  has  been  relieved  of 
certain  active  duties  of  his  office  and  becomes  a  somewhat 
ornamental  head  of  the  corporation,  the  president  mean- 
while retaining  the  more  active  duties  of  the  president's 
office. 

The  secretary  is  one  of  the  necessary  officers  of  a  cor- 
poration, so  necessary  in  fact  that  the  corporation  laws 
of  the  several  states  require  the  appointment  of  such  an 
officer  and  specify  the  more  important  duties  that  he  is  to 
perform.  The  New  Jersey  lawr,  for  example,  provides 
that  "the  secretary  shall  be  sworn  to  the  faithful  dis- 
charge of  his  duty,  he  shall  record  all  the  votes  of  the 
corporation  and  directors  in  a  book  to  be  kept  for  that 
purpose,  and  perform  such  other  duties  as  shall  be  as- 
signed to  him."  In  the  by-laws  of  the  United  States 
Steel  Corporation,  other  duties  assigned  to  the  secretary 
are  as  follows :  He  is  required  to  keep  the  minutes  of  the 
meetings  of  the  board  of  directors  and  of  the  stockhold- 
ers; to  serve  all  notices  for  the  company;  to  sign  with 


106  Organizing  a  Business 

the  president  all  contracts  authorized  by  the  board  of 
directors  or  the  finance  committee  and  to  affix  the  seal  of 
the  company  to  the  same ;  to  have  charge  of  the  certificate 
books  and  transfer  books,  the  stock  ledgers,  and  such 
other  books  as  the  directors  or  the  finance  committee  may 
direct,  and  keep  them  open  for  inspection  by  the  proper 
officers  during  business  hours ;  and  in  general  to  perform 
the  duties  incident  to  his  office,  subject  to  the  control  of 
the  directors  and  the  finance  committee.  In  the  larger 
companies  the  secretary  has  one  or  more  assistants, 
whose  duties  are  assigned  in  the  by-laws  or  determined 
by  order  of  the  board  of  directors. 

A  third  officer  generally  required  by  the  corporation 
act  in  all  of  the  states  is  the  treasurer.  In  the  New  Jer- 
sey code  the  only  provision  made  in  regard  to  this  officer 
is  that  a  treasurer  shall  be  chosen  and  that  he  shall  give 
a  bond  for  the  faithful  discharge  of  his  duties  in  such 
sum  and  with  such  surety  or  sureties  as  the  by-laws  may 
require.  The  by-laws  must  then  provide  for  the  treas- 
urer's bond,  and  in  addition  it  is  usual  to  give  an  outline 
of  his  more  important  duties.  His  chief  function,  of 
course,  is  to  have  oversight  of  all  the  moneys  and  secur- 
ities belonging  to  the  corporation.  He  keeps  his  own 
books  and  in  some  cases  he  has  entire  charge  of  the  books 
of  the  company.  Ordinarily  certain  papers  and  docu- 
ments of  an  important  financial  character  require  his 
signature,  such,  for  example,  as  stock  certificates,  bills  of 
exchange,  promissory  notes,  receipts,  vouchers  for  pay- 
ments made  to  the  company;  he  may  also  be  authorized 
to  sign  checks,  sometimes  alone  and  sometimes  in  con- 
junction with  another  officer  designated  for  this  purpose. 
In  all  of  his  duties  it  is  usual  to  prescribe  in  the  by-laws 
that  he  shall  be  subject  to  the  control  of  the  board  of 
directors  and  shall  keep  his  books  and  accounts  open  to 


The  By-Laws  107 

the  inspection  of  those  authorized  to  see  the  same  during 
business  hours.  In  the  larger  corporations,  like  the  sec- 
retary, he  has  one  or  more  assistant  treasurers  acting  un- 
der his  immediate  direction. 

Such  other  officers  are  provided  for  in  the  by-laws  as 
the  conditions  of  each  corporation  seem  to  warrant.  The 
two  most  important  of  such  are  the  general  counsel  and 
the  auditor.  The  general  counsel  is,  as  the  name  indi- 
cates, the  chief  legal  officer  of  the  corporation.  All  mat- 
ters concerning  the  laws  under  which  the  corporation  is 
organized  and  conducted  are,  by  the  by-laws,  entrusted 
to  his  immediate  care.  In  the  case  of  railways  and  cer- 
tain large  business  corporations  the  chief  counsel  is 
assisted  by  a  staff  of  assistant  solicitors. 

The  auditor  is  one  of  those  indispensable  officers  whose 
real  value  has  only  recently  been  recognized  in  business 
organization  and  management.  Until  recently,  all  the 
work  of  the  auditor  has  been  subdivided  among  the  secre- 
tary, the  treasurer,  and  the  head  bookkeeper.  Within 
the  last  quarter  of  a  century,  however,  the  complexity  of 
the  modern  business  organizations  has  made  necessary 
not  only  more  elaborate  accounts,  but  also  their  concen- 
tration in  a  general  office  especially  created  for  that 
purpose,  controlling  and  unifying  all  of  the  accounts. 
Consequently  in  many  of  the  more  complex  business  or- 
ganizations the  auditor  is  provided  for  in  the  by-laws  and 
his  duties  are  there  specified.  Wherever  such  an  office 
exists,  the  holder  of  it  is  authorized  in  the  by-laws  to  take 
charge  of  all  the  accounts  of  the  company,  subject,  of 
course,  to  the  general  directions  of  the  board.  He  has 
a  staff  of  assistants,  whose  duties  are  arranged  by  the 
directors,  subject  to  his  personal  direction. 

In  the  smaller  corporations  the  president,  by  virtue  of 
his  office,  usually  occupies  the  position  of  general  man- 


108  Organizing  a  Business 

ager.  In  the  medium- sized  ones  it  is  common  to  delegate 
a  portion  of  his  duties  to  the  general  manager.  In  such 
cases  the  by-laws  give  the  latter  a  certain  independence 
of  position  by  specifying  that  he  shall,  under  the  super- 
vision of  the  board  of  directors  and  the  president,  have 
charge  of  managing  the  active  business  operations  of  the 
corporation.  In  the  larger  companies,  however,  the 
duties  of  the  general  manager,  as  previously  stated,  are 
usually  divided  up  and  entrusted  to  several  officers,  who 
are  generally  designated  as  vice-presidents  in  charge  of 
the  various  departments  created  by  order  of  the  board  of 
directors. 

DIVIDENDS  AND  FINANCE 

The  distinguishing  characteristic  of  the  business  cor- 
poration as  compared  with  a  municipal  or  a  social 
corporation  is  that  it  exists  to  earn  profits  and  to  declare 
the  same  in  the  form  of  dividends.  It  is  possible,  how- 
ever, to  declare  what  may  erroneously  be  called  dividends 
out  of  the  capital  assets  and  thus  impair  the  future  earn- 
ing capacity  of  the  corporation.  On  the  other  hand,  it  is 
possible  to  declare  no  dividends  at  all,  where  a  corpora- 
tion is  earning  a  reasonable  rate  of  profit,  by  keeping  the 
surplus  earnings  and  reinvesting  the  same  in  the  prop- 
erty or  in  other  industrial  undertakings.  It  is  considered 
desirable  to  formulate  a  dividend  policy  for  the  organiza- 
tion in  some  of  the  formal  documents  connected  with  its 
organization. 

Formerly  the  states  in  their  corporation  laws  exercised 
very  little  supervision  over  the  matter  of  dividends  of  a 
corporation.  Owing  to  the  development  of  certain  evils, 
such,  for  example,  as  stock  speculation  by  the  directors 
or  wasting  the  assets  for  the  purpose  of  defrauding  the 
creditors,  it  is  common  to  provide  in  the  general  cor- 


The  By-Laws  109 

poration  act  that  dividends  may  be  paid  only  out  of  the 
earnings  and  that  the  directors  shall  be  jointly  and  sev- 
erally liable  for  dividends  paid  out  of  the  capital  assets. 
On  the  other  hand,  some  states  provide  that,  unless  other- 
wise authorized  by  the  majority  of  the  stockholders  in 
the  articles  of  incorporation  or  in  the  by-laws,  the  direc- 
tors must  annually  declare  in  dividends  the  surplus 
profits  over  and  above  the  working  capital  fixed  by  vote 
of  the  stockholders. 

It  is  required  in  some  cases  and  desirable  in  all  that 
a  dividend  policy  within  the  limits  fixed  by  statute  law 
shall  be  definitely  formulated  and  stated  in  the  by-laws 
if  not  in  the  charter.  It  is  then  customary  to  specify 
that  dividends  shall  be  paid  only  out  of  the  surplus  profits 
of  the  corporation.  It  is  also  common  to  permit  the  di- 
rectors to  fix  the  amount  of  the  working  capital  and  in 
some  cases  to  determine  whether  the  earnings  shall  be 
declared  in  dividends  or  used  to  improve  the  property. 
In  the  ordinary  meaning  of  the  word,  dividends  include 
payments  in  money  only.  The  so-called  stock  dividends 
are  in  reality  an  increase  of  the  capital  stock  distributed 
to  the  stockholders  pro  rata  as  a  gift  or  to  represent  ac- 
cumulated earnings  or  sold  at  less  than  their  real  value. 
Furthermore,  it  is  customary  to  provide  that  the  divi- 
dends be  declared  annually  or  semi-annually  rather  than 
at  times  chosen  in  some  haphazard  way. 

It  is  difficult  to  arrange  for  all  of  the  above  matters  in 
advance  since  the  rate  of  earnings  must  always  be  some- 
what uncertain  and  consequently  any  such  regulation  in 
the  by-laws  is  likely  to  be  an  expression  of  policy  rather 
than  a  fixed  rule. 

The  amount  of  working  capital  or  reserve  is  ordinarily 
fixed  by  the  directors.  Under  the  New  Jersey  law  ex- 
press authority  must  be  granted  them  in  the  charter  or 


110  Organizing  a  Business 

by-laws  in  order  that  this  policy  may  be  legally  followed. 
By  varying  the  amount  of  the  working  capital,  it  will  be 
noticed  that  the  surplus  available  for  dividends  can  be 
controlled  at  will.  Consequently  the  by-laws  of  some 
companies  provide  that  the  working  capital  shall  be  fixed 
at  a  certain  percentage  of  the  total  assets.  Under  such 
circumstances  it  becomes  necessary  to  declare  the  re- 
mainder of  the  surplus  earnings  in  dividends  at  regular 
periods. 

While  ordinarily  the  financial  affairs  of  a  corporation 
are  entirely  subject  to  the  control  of  the  board,  it  is  com- 
mon to  specify  that  the  cash  of  the  company  be  kept  in 
some  conservative  bank  and  that  all  payments  on  behalf 
of  the  company  be  made  by  check,  duly  signed  by  the 
proper  officers,  usually  the  president  and  the  secretary. 
It  is  also  common  to  provide  in  this  formal  way  that  all 
debts  contracted  above  a  certain  specified  sum  shall  be 
duly  authorized  by  a  majority  vote  of  the  board  of  di- 
rectors. The  object  of  this  is  to  hold  the  directors  re- 
sponsible to  the  stockholders  whenever  they  unduly  in- 
crease the  obligations  of  the  company. 

AMENDMENTS    TO    THE    BY-LAWS 

The  by-laws  should  contain  a  clause  providing  for  their 
own  amendment  under  such  conditions  that  the  will  of 
the  corporation,  expressed  through  its  majority,  is  likely 
to  be  effected.  In  Illinois,  where  the  statute  provides 
that  the  by-laws  shall  be  made  and  amended  by  the  di- 
rectors, the  amendment  clause  in  well-managed  corpora- 
tions contains  the  following  provisions :  That  proper  no- 
tice of  a  proposed  amendment  must  be  given  by  the  offi- 
cers and  that  the  changes  proposed  shall  go  into  effect 
only  when  considered  by  the  board  at  some  regular  meet- 
ing and  approved  by  a  specified  majority. 


The  By-Laivs  111 

In  states  like  New  Jersey,  where  the  ultimate  control 
over  the  by-laws  is  entrusted  to  the  stockholders  or 
where  this  power  may  by  the  charter  be  given  to  the  di- 
rectors, subject  to  final  alteration  by  the  stockholders, 
the  amendment  clause  should  state  the  conditions  under 
which  the  directors  may  exercise  their  power  of  amend- 
ment and  the  methods  by  which  the  stockholders  may  ex- 
ercise their  superior  right  to  alter  or  veto  such  acts. 

Where  the  right  is  retained  by  the  stockholders,  the 
method  of  amendment  should  be  given  at  length  and 
should  provide  for  full  notice  of  the  amendments  and  for 
the  formal  approval  of  at  least  a  majority  of  the  stock- 
holders at  a  regular  meeting  or  a  meeting  called  for  the 
purpose  of  considering  the  amendment,  in  order  that 
such  amendments  be  made  a  part  of  the  rules  under 
which  the  corporation  operates. 

Resolutions 

The  formal  matters  regulating  the  interior  govern- 
ment of  a  corporation,  the  methods  of  procedure,  and 
rights  and  duties  of  officers  and  directors  are  usually  con- 
tained in  the  by-laws.  Many  less  formal  matters  are, 
however,  disposed  of  by  means  of  resolutions.  These 
motions  usually  do  not  affect  permanent  relations  of 
vital  importance.  They  usually  affect  only  particular 
acts  or  occasions,  such,  for  example,  as  calling  a  special 
meeting  of  the  board  of  directors.  Instructions  to  the 
officers  and  agents  of  a  corporation  on  particular  ques- 
tions of  administrative  policy  are  likewise  usually  em- 
bodied in  resolutions  rather  than  by-laws.  In  gen- 
eral, therefore,  resolutions  control  matters  of  minor 
importance. 


112  Organizing  a  Business 

TEST  QUESTIONS 

1.  What  is  the  nature  of  the  by-laws  of  a  corporation? 

2.  What  six  important  topics  are  usually  included  under  the 
by-laws  ? 

3.  What  provisions  do  they  usually  contain  with  regard  to 
stock? 

4.  What  do  the  by-laws  usually  provide  in  regard  to  the  duties 
of  the  president? 

5.  What  officers  are  usually  required  under  the  corporation 
laws  of  the  different  states  ? 

6.  What  provisions  are  included  in  the  by-laws  concerning  the 
dividend  policy  of  a  corporation?  What  evils  do  they  attempt 
to  hit  ? 

7.  By  whom  may  the  by-laws  be  amended?  under  what  regu- 
lations? 

8.  Distinguish  between  the  by-laws  and  the  resolutions  of  a 
corporation. 


CHAPTER  VIII 

RIGHTS     AND     OBLIGATIONS     OF    BONDHOLDERS,     STOCK- 
HOLDERS, AND  CREDITORS 

From  the  proprietary  point  of  view  the  corporation 
under  usual  conditions  is  made  up  of  two  groups,  each 
having  distinct  rights,  privileges,  and  liabilities.  These 
two  groups  are  the  bondholders  and  the  stockholders. 

Rights  op  Bondholders 

The  rights  of  the  bondholders  in  a  corporate  organiza- 
tion are  fixed  partly  by  statute  law  and  partly  by  con- 
tract between  the  bondholders  and  the  stockholders  rep- 
resenting the  corporation.  In  the  simpler  cases  the  bonds 
issued  are  all  of  one  class  and  the  bondholders  enjoy 
equal  rights  and  privileges.  As  a  result,  however,  of  the 
rapid  growth  of  corporate  enterprises,  those  companies 
which  originally  started  with  a  simple  bond  issue  usually 
have  found  it  desirable,  in  the  course  of  time,  to  issue 
additional  bonds.  Instead  of  paying  up  the  outstanding 
obligations  and  issuing  new  ones  in  their  places,  it  was 
formerly  the  custom  to  allow  the  bonds  already  issued  to 
remain  until  the  expiration  of  their  period  and  add  a 
second  class  of  bonds  subordinate  to  the  former  issues 
both  in  respect  to  the  right  to  interest  and  to  the  assets. 
This  process  is  often  continued  until  a  corporation  may 
have  many  different  classes  of  bonde,  each  having  dif- 
ferent rights  and  different  privileges. 

The  disadvantages  of  this  policy  are  obvious.  The 
bonds  issued  in  small  lots  have  no  standing  in  the  gen- 
eral bond  market  and  consequently  the  sale  of  succeeding 

113 


114  Organizing  a  Business 

issues  becomes  more  and  more  difficult.  Recognizing 
the  disadvantages  of  issuing  bonds  in  driblets  as  the 
corporation  needs  more  and  more  capital,  the  Great 
Northern  Railway  several  years  ago  adopted  the  policy 
of  authorizing  a  general  mortgage  bond  issue  of  suffi- 
cient size  to  provide  funds  not  only  for  the  new  additions 
to  capital  made  necessary  by  the  demands  of  a  rapidly 
growing  traffic,  but  also  to  retire  the  outstanding  bonds 
as  they  came  due  from  year  to  year.  This  change  in 
policy  has  been  generally  approved  by  the  bond  market. 
Since  the  Great  Northern  Railway  Company  made  the 
innovation,  many  other  important  railway  corporations 
have  followed  in  its  lead.  Consequently  the  smaller  and 
less  known  issues  of  bonds  are  gradually  disappearing 
and  large  issues  of  general  mortgage  bonds  are  taking 
their  place. 

In  general,  without  regard  to  the  different  classes  of 
bonds,  the  holders  of  the  same  have  two  fundamental 
rights:  (1)  to  receive  a  fixed  rate  of  interest  during  the 
period  which  the  bond  runs;  and  (2)  to  receive  the  face 
value  of  the  bond,  or  the  face  value  plus  a  premium  under 
certain  conditions,  when  the  term  of  the  bond  ends  or  the 
corporation  is  dissolved.  In  addition  the  bondholders 
have  certain  privileges  through  which  they  are  enabled 
to  enforce  their  property  rights :  (1)  to  have  the  business 
managed  in  their  interest  if,  for  any  reason,  the  rate  of 
interest  specified  in  the  bond  fails  to  be  paid;  (2)  in  com- 
mon with  others,  to  bid  for  the  property  upon  which  the 
bonds  are  secured  in  cases  where,  owing  to  the  failure  to 
pay  interest  charges,  the  corporation  becomes  bankrupt; 
(3)  to  reorganize  themselves  into  a  new  corporation  and 
take  entire  control  of  the  property  and  its  management 
where  they  are  successful  in  bidding  the  property  in  at 
the  bankrupt  sale. 


Rights  and  Obligations  115 

Bondholders  are  thus  proprietors  who  have  relin- 
quished the  privilege  of  actively  directing  the  business  in 
which  they  are  interested  in  exchange  for  a  first  claim 
upon  the  earnings  during  operation  and  upon  the  assets 
in  case  of  dissolution.  Their  contingent  rights  in  the 
management  of  the  enterprise  appear  in  the  true  light 
whenever  a  corporation  is,  for  any  reason,  unable  to  pay 
the  specified  rate  of  interest.  The  immediate  result  of 
the  failure  to  pay  the  specified  interest  is,  under  normal 
conditions,  the  appointment  of  a  receiver  by  the  courts 
to  represent  the  interests  of  the  bondholders  and  to  man- 
age the  property  for  them.  If  the  receivership  is  un- 
usually successful,  the  business  may  be  turned  over  to 
the  stockholders  as  soon  as  it  is  able  to  make  up  the 
deferred  interest  and  to  continue  the  stipulated  rate  for 
the  immediate  future.  In  ordinary  cases,  however,  a  cor- 
porate enterprise  is  reorganized  or  sold.  In  the  first 
case,  the  bondholders  remain  bondholders  generally  with 
curtailed  privileges  or  become  stockholders  with  pre- 
ferred rights ;  in  the  latter  case,  they  often  purchase  the 
business,  reorganize  it  themselves,  and  thus  become  the 
only  stockholders  in  the  new  enterprise. 

Where  there  are  several  classes  of  bonds,  the  respec- 
tive rights  of  each  class  are  fixed  by  the  terms  under 
which  they  are  issued  and  follow  in  regular  gradations 
from  the  highest  to  the  lowest.  Those  in  the  lowest 
grade,  in  practically  all  cases,  precede  the  highest  grade 
stocks  in  the  rights  to  the  earnings  and  assets,  and 
usually  all  classes,  except  the  very  lowest,  have  no  direct 
right  to  participate  in  the  management  except  as  a  re- 
sult of  actual  bankruptcy  and  the  consequent  reorgani- 
zation. 

Thus  stockholders  in  a  well-organized  corporation 
have  a  double  motive  to  limit  the  amount  of  the  bonds  to 


116 


Organizing  a  Business 


a  sum  upon  which  they  are  able  to  pay  interest  during 
the  term  of  the  bonds  and  their  face  at  expiration:  (1) 
as  stated  in  a  previous  section,  because  the  larger  the 
amount  of  bond  issue,  the  higher  the  rate  of  interest  at 
which  they  can  be  sold  in  the  open  market;  and  (2)  be- 
cause in  addition  to  paying  a  high  rate  of  interest  the 
stockholders  are  in  danger  of  losing  their  own  rights  in 
both  the  assets  and  the  future  earnings  whenever  the 
business  for  any  reason  is  subjected  to  unfavorable  con- 
ditions. 

Rights  of  Stockholders  as  a  Body 

The  stockholders  have  certain  rights  which  are  exer- 
cised only  through  group  action  and  are  specified  in  de- 
tail in  the  general  corporation  act,  the  charter,  and  the 
by-laws.  These  rights  are:  (1)  to  amend  and  alter  the 
charter  and  the  by-laws;  (2)  to  dissolve  the  corporation; 
(3)  to  elect  the  directors  and  in  some  cases  to  supervise 
the  management  of  the  corporation  through  control  over 
the  by-laws;  (4)  to  have  control  over  the  disposition  of 
the  permanent  assets  of  the  corporation. 

The  charter,  being  the  organic  law  under  which  the 
stockholders  are  united,  is,  almost  universally,  amended 
or  changed  only  by  their  formal  approval  and  usually  by 
a  two-thirds  majority.  Since  by  changing  the  charter 
the  very  nature  and  operations  of  a  corporation  may  be 
entirely  altered,  the  statute  law  of  the  various  states  has 
very  properly  provided  that  proposals  for  such  changes 
must  be  offered  some  time  in  advance  of  their  considera- 
tion; that  due  notice  of  such  proposals  must  be  given; 
and  that  the  amendments  must  be  approved  by  a  large 
majority  of  stockholders  before  they  go  into  legal  effect. 
The  same  is  true,  to  a  somewhat  more  marked  extent,  in 
regard  to  the  dissolution  of  the  corporation.    However, 


Rights  and  Obligations  117 

successful  corporations  are  seldom  dissolved,  and  unsuc- 
cessful ones  are  often  permitted  to  lapse  through  failure 
to  pay  the  annual  license  fees  and  taxes. 

In  all  cases  the  direct  control  over  the  corporation  is 
exercised  by  the  directorate.  Consequently  the  method 
by  which  the  directors  are  elected  is  ordinarily  stated  at 
length  in  the  general  corporation  act*  In  some  cases, 
however,  the  regulations  concerning  the  election  of  direc- 
tors are  left  for  the  charter  and  the  by-laws.  In  some 
instances,  the  directors  are  elected  as  a  body  annually ;  in 
others  they  are  elected  in  classes,  each  class  serving  for 
a  period  of  years.  In  either  case,  since  the  stockholders 
have  the  right  to  elect,  it  is  possible  for  them  to  outline 
the  policy  which  they  wish  to  have  followed  and  secure  a 
pledge  from  the  successful  candidates  for  the  directorate 
in  favor  of  such  policy. 

Where  the  directors  are  elected  in  classes,  it  always  re- 
quires at  least  two  years  for  the  stockholders  to  gain  con- 
trol over  a  directorate  which  fails  to  represent  them. 
However,  whether  the  directors  are  elected  annually  or 
for  a  period  of  years,  they  are  by  the  laws  of  the  various 
states  permitted  to  act  upon  their  own  judgment  in  the 
management  of  the  corporate  business.  In  a  few  cases 
only,  stockholders  have  a  right  to  supervise  or  approve 
the  formal  action  of  the  board  of  directors.  The  most 
important  of  these  are:  (1)  The  permanent  assets  of  a 
corporation  may  ordinarily  be  sold  only  on  the  approval 
of  a  vote  of  the  stockholders ;  and  (2)  no  mortgage  or 
other  long  term  obligation  may  ordinarily  be  authorized 
by  the  directors  without  their  approval.  The  principle, 
as  above  stated,  holds  true  ordinarily  for  each  class  of 
stockholders.  Whenever  a  corporation  is  created  with 
one  class  of  stock  only,  no  stock  with  superior  rights  may 
be  issued  except  with  the  approval  of  the  class  already  in 


118  Organizing  a  Business 

existence;  and  wherever  there  are  two  classes  of  stock 
provided  for,  no  third  class  having  superior  rights  may- 
be created  by  the  board  of  directors  without  the  formal 
consent  of  both  the  previous  classes. 

The  control  over  the  management  of  a  corporation 
entrusted  to  the  stockholders,  namely,  the  right  to  elect 
directors,  to  approve  the  sale  of  permanent  assets,  and 
to  authorize  the  issue  of  superior  obligations,  is,  as  will 
be  noticed,  a  right  that  belongs  to  the  majority  of  the 
stockholders  expressed  by  a  vote  in  a  formal  meeting  of 
the  corporation.  Where  the  majority  of  the  stock  is  held 
by  a  small  group  of  men,  the  minority,  which  under  such 
circumstances  is  likely  to  be  represented  by  a  consid- 
erable number  of  small  stockholders,  has  no  recourse 
against  such  majority  rule  except  in  cases  of  actual  fraud 
or  dishonesty. 

Eights  of  Stockholders  as  Individuals 

As  individuals,  stockholders  have  additional  rights, 
some  of  which  depend  largely  upon  the  approval  of  the 
majority  by  formal  action  for  their  proper  protection. 
The  more  important  of  these  rights  are:  (1)  to  partici- 
pate in  all  stockholders'  meetings;  (2)  to  receive  certain 
kinds  of  information  and,  within  specified  limitations,  to 
inspect  the  books  and  accounts  of  the  company;  (3)  to 
share  in  the  dividends  declared  during  the  life  of  the  cor- 
poration and  in  the  assets  at  its  dissolution. 

RIGHT    OF    NOTICE 

In  the  first  place  each  stockholder  has  the  right  to  at- 
tend all  regular  and  special  meetings  of  the  corporation 
and  to  have  good  and  sufficient  notice  of  the  same,  in- 
cluding the  time  of  the  meeting  and  the  place  where  it  is 
to  be  held.    He  is  also  entitled  to  have  information  in 


Rights  and  Obligations  119 

regard  to  the  character  of  the  meeting  and  the  business 
that  is  to  be  presented  for  his  consideration.  In  some 
cases  such  notice  may  be  given  by  advertisement  in  some 
newspaper  designated  by  law,  but  usually,  even  where 
an  advertisement  is  required,  a  written  or  printed  notice 
must  be  mailed  to  the  address  of  each  stockholder. 

EIGHT    TO    DISCUSSION 

In  the  second  place,  each  stockholder  has  the  right  to 
take  part  in  the  discussions  at  the  various  meetings,  un- 
der the  ordinary  rules  of  parliamentary  practice.  He 
may  ask  for  information  upon  the  business  policy  and 
practice  of  the  management  and  offer  resolutions  for  the 
consideration  of  the  stockholders,  directing  the  manage- 
ment to  take  specific  action  where  such  action  is  within 
the  scope  of  the  stockholders '  authority  and  advising  the 
officers  in  other  cases. 

EIGHT    TO    PEOXY 

In  the  third  place,  each  stockholder  has  the  right,  gen- 
erally under  statute  law,  to  be  represented  by  some  per- 
son chosen  to  act  in  his  stead  when  for  any  reason  it  is 
inconvenient  or  impracticable  for  him  to  attend  in  person. 
The  instrument  by  which  this  right  is  conferred  is  the 
proxy  or,  more  formally,  a  special  power  of  attorney. 
Such  right  may  be  conferred  for  action  upon  a  particular 
proposition  or  for  a  particular  meeting  or  for  all  meet- 
ings within  the  limit  of  time  sanctioned  by  the  law  of  the 
state.  In  any  of  these  cases  the  holder  of  the  proxy  may 
be  authorized  to  vote  upon  a  certain  proposition  in  a  spe- 
cific way  or  he  may  be  authorized  to  act  upon  his  own 
judgment  on  any  of  the  questions  that  legitimately  come 
before  the  stockholders  for  their  approval  or  rejection. 
Under  any  circumstances  the  stockholder  may  revoke  the 

•7 


120  Organizing  a  Business 

proxy  which  he  has  granted  whenever  he  chooses,  and  in 
many  states  the  life  of  all  proxies  is  limited  by  law  to  a 
term  of  years. 

In  the  case  of  holding  companies  voting  the  stock  of 
other  corporations,  a  corporate  proxy  properly  attested 
may  be  issued  to  some  individual,  who  then  represents 
the  holding  corporation.  A  directors'  resolution  when 
duly  certified  is  an  excellent  form  of  corporate  proxy. 
When  the  statutes  empower  the  corporate  officials  of  a 
holding  company  to  vote  the  stock  of  other  corporations 
held  by  them,  no  proxy  is  necessary.  A  certification  that 
the  officer  properly  represents  the  company  is  all  that  is 
required. 

The  proxy  has  its  own  peculiar  advantages  and  disad- 
vantages, which  should  be  noticed  at  this  point.  It  is  ob- 
vious that  it  permits  the  stockholder  to  be  represented 
without  actually  being  present  in  person.  This  makes  it 
practicable  for  Englishmen  to  own  shares  of  stock  in  the 
South  African  diamond  mines  and  for  residents  of  the 
eastern  states  to  invest  their  surplus  capital  in  develop- 
ing the  industries  of  the  western  states.  This  is  espe- 
cially true  of  the  small  investor,  who  can  take  up  only  a 
few  shares  in  a  corporation.  To  attend  the  various  meet- 
ings of  the  stockholders  would  entail  an  expense  greater 
than  the  total  income  which  he  derives  from  his  shares, 
and  he  would  hardly  care  to  invest  in  the  stock  of  com- 
panies where  he  has  legal  liabilities  as  a  shareholder, 
but  no  practical  method  of  exercising  his  legal  right  of 
participating  in  the  meetings. 

The  proxy,  then,  gives  the  small  stockholder  a  cheap 
method  of  representation  at  all  the  meetings  of  the  cor- 
poration. Like  all  other  good  things,  however,  it  is  lia- 
ble to  abuse.  This  may  arise  either  as  a  result  of  mis- 
representation by  the  proxy  holder  or  through  granting 


Rights  and  Obligations  121 

the  right  to  unsuitable  representatives.  In  the  first  case, 
that  of  misrepresentation,  the  normal  corrective  would 
seem  to  lie  in  granting  a  specific  proxy  only.  Such  treat- 
ment of  the  evil  of  misrepresentation  is,  however,  im- 
practicable. In  the  first  place,  many  matters  come  up  for 
action  at  the  various  meetings  that  are  unforeseen,  and 
in  the  second  place  intelligent  action  is  often  possible 
only  after  a  full  discussion  of  the  proposition.  To  tie 
up  the  delegates  by  specific  proxies  nullifies  all  the  good 
that  may  come  from  full  and  free  discussion  on  the  part 
of  the  persons  at  the  meeting. 

Through  the  use  of  the  proxy  it  is  possible  to  hold  a 
meeting  of  the  stockholders  of  the  largest  corporation 
with  only  one  person  present  where,  for  any  reason,  such 
person  holds  all  or  a  majority  of  the  proxies.  It  will  be 
readily  seen  that  in  order  to  control  the  management  the 
simplest  way  is  to  secure  by  solicitation,  previous  to  the 
meeting,  proxies  representing  a  majority  of  the  stock  out- 
standing. Sometimes  the  struggle  for  proxies  beeomes 
so  fierce  and  bitter  as  to  resemble  a  civil  war  and  to  re- 
sult in  the  overthrow  of  a  management  of  long  standing, 
as  in  the  case  of  the  Fish-Harriman  contest  for  the  con- 
trol of  the  Illinois  Central  Railroad,  in  1907. 

Where  a  majority  of  the  proxies  are  in  the  control  of 
one  person  or  in  the  control  of  a  certain  faction  repre- 
senting the  board  of  directors,  the  individual  stockhold- 
ers at  the  meeting,  while  able  to  take  part  in  the  discus- 
sion, are,  it  will  be  seen,  unable  to  influence  the  vote  of 
the  corporation,  since  such  vote  is  entirely  controlled 
by  the  person  or  the  group  holding  the  majority  of  the 
proxies.  So  complete  is  this  control  at  times  that  even 
the  minutes  of  the  meeting  have  been  prepared  before- 
hand. The  meeting  itself  then  becomes  a  mere  formality 
to  give  the  proceedings  their  legal  sanction. 


122  Organizing  a  Business 

In  voting  at  stockholders '  meetings  the  general  rule  is 
that  each  share  of  stock  has  one  vote.  As  noticed  above, 
however,  it  is  sometimes  provided,  as  in  the  charter  of 
the  Rock  Island  Company,  that  the  shareholders  of  the 
preferred  stock  shall,  in  the  election  of  the  directors,  vote 
independently,  and  may  elect  nine  of  the  fifteen  directors. 
The  common  stockholders  elect  the  remainder.  Such  a 
provision  virtually  gives  the  control  of  the  corporation 
into  the  hands  of  the  holders  of  the  preferred  stock. 

CUMULATIVE    VOTING 

The  second  variation  from  the  usual  method  is  found 
in  the  use  of  the  principle  of  cumulative  voting.  In  some 
states,  as,  for  example,  in  Illinois,  this  method  is  author- 
ized by  the  constitution  and  is  therefore  a  right  that  be- 
longs to  the  individual  stockholder.  Under  the  system  of 
cumulative  voting  each  stockholder  may  cast  all  his  votes 
for  one  director  or  distribute  his  votes  among  several,  as 
he  pleases.  The  method  thus  insures,  under  any  and  all 
circumstances,  that  a  small  group  of  stockholders,  by 
acting  in  concert,  may  have  at  least  one  representative 
on  the  board  of  directors.  It  is  thus  one  of  the  most 
effective  provisions  against  the  evils  of  majority  rule. 

RIGHT    TO    INFORMATION 

In  a  partnership  each  of  the  partners  participates  in 
the  management  and  therefore  has  both  the  opportunity 
and  the  right  to  know  all  the  details  of  the  company's 
business.  The  corporation  is,  however,  both  historically 
and  logically,  a  highly  developed  form  of  partnership  in 
which  the  members  entrust  the  active  management  to  an 
elected  board  of  directors.  As  a  result  of  its  origin,  the 
stockholders  formerly  possessed  the  same  right  to  com- 
plete information  in  regard  to  the  corporation  and  its 


Rights  and  Obligations  123 

internal  affairs  as  was  enjoyed  by  the  partners  in  a  firm. 
Each  stockholder  was  permitted  to  go  into  the  office  or  to 
the  works  at  his  pleasure.  It  was  found,  as  a  result  of 
experience,  that  this  privilege  was  particularly  open  to 
abuse. 

In  a  partnership  each  partner  is  likely  to  devote  his 
entire  time  and  energy  to  a  single  business  enterprise. 
The  individual  stockholder,  on  the  other  hand,  is  more 
likely  to  be  interested  in  several  enterprises.  He  may 
even  become  a  competitor  of  himself  and  thus  desire  in- 
formation in  regard  to  business  conditions  and  business 
policy  of  the  corporations  in  which  he  is  the  least  inter- 
ested for  the  purpose  of  using  such  information  to  help 
those  in  which  he  is  more  interested.  In  many  instances 
competitors  have  often  purchased  a  share  of  stock  in 
some  rival  corporation  in  order  to  gain  information 
which,  under  ordinary  circumstances,  would  be  entirely 
beyond  their  power  to  secure. 

This  condition  has  led  legislatures  and  courts  to  adopt 
quite  a  different  policy  from  that  originally  pursued.  In 
general  the  stockholder  is  permitted  to  examine  the  stock 
and  transfer  books  by  applying  at  the  principal  office  dur- 
ing office  hours.  However,  where  there  is  good  reason  to 
believe  that  the  party  asking  for  such  information  in- 
tends to  make  improper  use  of  it,  the  courts  will  not  aid 
him  by  issuing  the  proper  writ.  As  to  the  business  books 
of  the  corporation,  the  stockholder  usually  has  no  right 
of  inspection  at  all.  For  example,  he  cannot  legally  en- 
force a  demand  for  information  in  regard  to  the  pur- 
chases or  sales  of  a  company  or  in  regard  to  its  contracts, 
and  the  like. 

He  is,  however,  usually  able  to  secure  annual  reports 
summarizing  the  income  for  the  year  and  showing  the 
financial  condition  of  the  corporation  at  its  termination. 


124  Organising  a  Business 

But  such  rights  may  often  be  relinquished  by  the  stock- 
holders, for  the  time  being,  by  the  insertion  of  clauses 
authorizing  such  action  in  the  charter  or  the  by-laws.  As 
a  matter  of  fact,  owing  to  the  insistent  demand  of  most 
investors  for  information  in  regard  to  the  financial  con- 
dition of  the  corporations  in  which  they  hold  stock,  cor- 
porations appealing  to  the  general  public  for  funds  can- 
not successfully  for  any  length  of  time  adopt  a  secretive 
business  policy.  Such  institutions  as  the  Standard  Oil 
Company  and  the  American  Sugar  Refining  Company  are 
apparently  marked  exceptions  to  this  general  rule,  hav- 
ing been  so  successful  under  the  policy  of  giving  no 
information  to  anyone  that  their  stockholders  have  made 
no  attempt  to  secure  even  adequate  annual  reports. 

With  railroads  and  public  service  corporations  the  case 
is  entirely  different.  By  the  adoption  of  the  Interstate 
Commerce  Law  in  1887,  railways  doing  interstate  busi- 
ness are  obliged  to  furnish  monthly  and  annual  state- 
ments to  the  Commission,  and  such  reports  are  published 
annually  in  a  volume  called  Statistics  of  Railways  in  the 
United  States.  The  states  quite  generally  require  similar 
reports  from  local  railways  and  other  public  service  cor- 
porations. Some  of  this  information  is,  to  be  sure,  never 
published  and  some  of  it  is  worthless  even  after  being 
printed  and  distributed;  but  on  the  whole  the  tendency 
is  toward  better  and  more  fully  summarized  reports  for 
the  benefit  of  the  individual  stockholder,  so  that  he  places 
less  and  less  dependence  upon  his  own  direct  examination 
of  the  company's  books.  This  is  a  distinct  gain  for  legit- 
imate business  enterprises,  since  such  information  is 
more  trustworthy  and,  in  addition,  cannot  be  used  for 
the  purpose  of  injuring  the  business  of  the  corporation 
which  is  giving  the  information. 


Rights  and  Obligations  125 

EIGHTS  AS  TO  DIVIDENDS 

A  corporation  earning  a  regular  income  upon  its  in- 
vestment may  use  its  surplus  earnings  in  either  one  of  the 
two  following  ways:  (1)  It  may  improve  its  plant  and 
equipment  or  purchase  other  property;  (2)  it  may  de- 
clare such  earnings  to  the  stockholders  in  the  form  of 
dividends.  In  the  first  case,  the  capital  assets  increase  in 
value  and  such  increase  is  represented  on  the  company's 
books  as  a  surplus,  as  shown  in  the  following  balance 
sheet : 

Balance  Sheet — Corporation  F 

Assets  Liabilities 

Plant  and  machinery $10,000,000      Bonds    $  5,000,000 

Improvements    5,000,000      Stock   5,000,000 

Surplus    5,000,000 


Total   $15,000,000  $15,000,000 


Let  us  assume  that  the  corporation  has  been  operating 
for  five  years,  and  during  this  period  has  been  earning 
$1,000,000  annually,  but  has  used  this  income  to  improve 
its  plant  and  machinery.  Having  adopted  this  policy,  it 
has  been  unable  to  pay  dividends  in  the  ordinary  sense 
of  the  word.  The  stock  which  was  originally  worth  its 
face  value  is  now,  provided  the  improvements  were  de- 
sirable in  themselves,  worth  twice  its  face  value,  or  $200 
for  each  $100  share.  Supposing  at  this  point  that  no 
further  improvements  are  desirable  and  that  the  invest- 
ments out  of  profits  are  beginning  to  show  results  in  in- 
creased earning  power,  the  corporation,  having  been  able 
to  earn  $1,000,000  annually  on  the  $10,000,000  invested, 
will,  under  the  assumed  conditions,  earn  $1,500,000  an- 
nually on  its  $15,000,000  investment.  Assuming  a  5  per 
cent  rate  of  interest  on  the  bonds,  the  stock  was  earning 
$750,000  annually  before  the  improvements  were  begun, 


126  Organizing  a  Business 

or  a  rate  of  15  per  cent  upon  the  capital  stock;  and  after 
the  improvements  were  completed  it  would  earn  $1,250,- 
000  annually,  or  25  per  cent  on  the  stock.  The  directors 
may,  therefore,  begin  dividends,  provided  they  do  not 
deem  it  desirable  to  increase  the  cash  surplus  and  declare 
such  dividends  on  existing  stock  at  the  full  earning  rate, 
namely  25  per  cent.  This  policy  is,  however,  likely  to 
cause  public  criticism  and,  in  the  case  of  public  service 
corporations,  political  interference  with  the  rates  or  with 
the  quality  of  the  service  rendered  by  the  company. 

The  directors  may,  therefore,  adopt  a  different  policy. 
Since  each  share  having  a  par  value  of  $100  represents 
assets  worth  $200,  the  total  stock  of  the  company  may, 
by  an  amendment  to  the  charter,  be  doubled  in  amount 
and  one  share  of  new  stock  issued  as  a  gift  to  each  holder 
of  one  share  of  the  former  issue.  The  changes  caused 
by  this  policy  are  shown  in  the  following  balance  sheet : 

Balance  Sheet — Corporation  G 

Assets  Liabilities 

Plant  and  machinery  with  Bonds    $  5,000,000 

improvements     $15,000,000      Stock   10,000,000 


Total   $15,000,000  $15,000,000 


Stock  Dividends 

The  process  of  converting  the  existing  surplus  into  ad- 
ditional stock,  as  described  above,  is  called  "declaring  a 
stock  dividend,"  or,  in  the  expressive  language  of  Wall 
Street,  "cutting  a  melon."  Wherever  a  real  surplus  ex- 
ists and  the  stock  representing  it  is  issued  pro  rata  to  all 
the  present  stockholders,  no  valid  criticism  against  this 
method  of  declaring  a  dividend  can  be  presented.  Such  a 
surplus  can  be  created  only  by  withholding  the  earnings 
and  those  who  have  held  their  stock  during  the  waiting 


Rights  and  Obligations  127 

period  are  entitled,  upon  both  moral  and  economic 
grounds,  to  their  share  of  the  new  stock. 

In  some  cases,  however,  the  directors  instead  of  giving 
new  stock  as  a  bonus  to  the  existing  stockholders,  either 
by  choice  or  as  a  result  of  statute  law,  require  that  all 
new  issues  shall  be  sold  for  cash  and  offer  such  shares 
to  a  public  or  private  market.  Let  us  suppose  that  such 
shares  are  offered  to  the  existing  stockholders  pro  rata 
at  $75  per  share.  In  this  case  the  stock  is  offered  to  a 
private  market.  Those  stockholders  who  have  funds 
available  for  investment  are  in  a  position  to  take  up  their 
quota  and  thus  make  $25  per  share  by  purchasing  the  new 
stock  at  less  than  its  real  value.  On  the  contrary,  those 
who  have  no  funds  available  for  investment  at  the  time 
the  new  stock  is  offered  will  be  unable  to  take  advantage 
of  this  opportunity.  In  such  cases  the  stockholder's 
rights  to  subscription  become  of  value  when  a  corpora- 
tion, either  by  force  of  law  or  through  the  application  of 
the  principles  of  equity,  provides  for  such  contingencies, 
and  the  latter  class  of  shareholders  are  able  to  sell  their 
rights  for  cash  and  thus  realize  upon  their  surplus  in  this 
way. 

Until  the  economic  right  of  every  stockholder  to  partic- 
ipate in  the  distribution  of  dividends  through  the  issue  of 
additional  stock  shall  be  fully  guaranteed  by  statute  law 
in  every  state,  there  will  be  opportunity  to  withhold 
earnings  for  a  period  of  years,  create  a  surplus,  issue 
additional  stock  to  represent  the  same,  and  then  give 
those  shareholders  having  surplus  capital  the  chance, 
which  they  ordinarily  do  not  hesitate  to  use,  of  subscrib- 
ing for  stock  which  was  not  taken  up  by  the  other  share- 
holders. Fortunately  this  method  of  defrauding  certain 
members  of  the  corporation  for  the  benefit  of  the  rest  is 
of  much  less  importance  than  formerly,  owing  partly  to 


128  Organizing  a  Business 

the  protection  afforded  by  changes  in  the  statute  law  of 
many  states  and  partly  to  the  fact  that  stockholders  as  a 
result  of  experience  take  the  precaution  to  protect  them- 
selves when  new  issues  of  this  kind  are  authorized. 
Where  such  stock  is  offered  to  the  public  market,  those 
shareholders  in  closest  touch  with  the  financial  situation 
will  have  a  decided  advantage  in  taking  up  the  new  issues. 
At  the  present  time,  however,  such  stock  must  ordinarily 
be  offered  first  to  the  present  shareholders  rather  than 
to  the  public  market. 

Cash  Dividends 

In  the  second  case,  the  capital  assets  increase  regularly 
during  each  year,  but  at  the  end  of  such  period  are  re- 
duced to  their  former  status  by  the  conversion  of  the 
surplus  into  dividends.  The  changes  which  the  assets 
and  liabilities  of  a  corporation  undergo  as  a  result  of  this 
process,  are  shown  by  the  following  series  of  balance 
sheets : 

Balance  Sheet — Corporation  H 

(a)     at  the  beginning  of  the  yeae 

Assets  Liabilities 

Plant  aDd  machinery $10,000,000      Bonds    $  5,000,000 

Stock  5,000,000 


Total   $10,000,000  $10,000,000 


(b)     at  the  end  of  the  year 

Assets  Liabilities 

Plant  and  machinery $10,000,000       Bonds    $  5,000,000 

Cash    1,000,000      Stock     5,000,000 

Surplus   1,000,000 

Total   $11,000,000  $11,000,000 


Rights  and  Obligations  129 

(C)       AFTER   THE   DIVIDEND    IS   DECLARED 

Assets  Liabilities 

Plant  and  machinery.  .  .  .$10,000,000      Bonds    $  5,000,000 

Cash     1,000,000      Stock     5,000,000 

Dividend  No.  1 1,000,000 


Total   $11,000,000  $11,000,000 


(D)       AFTER  THE  DIVIDEND  IS  PAID 

Assets  Liabilities 

Plant  and  machinery $10,000,000      Bonds    $  5,000,000 

Stock     5,000,000 


Total     $10,000,000  $10,000,000 


Generally  the  right  to  declare  dividends  is  granted  to 
the  directors  of  a  corporation.  Under  such  circum- 
stances the  stockholders  cannot  by  vote  require  them  to 
take  action  upon  the  question  of  dividends,  much  less  fix 
the  rate  at  which  they  shall  be  declared.  However,  when 
once  a  dividend  is  declared  by  the  board  of  directors,  the 
individual  stockholders  have  the  right  to  share  in  it  in 
proportion  to  their  stock.  They  can  collect  the  amount 
due  them  from  the  corporation  by  use  of  the  legal  method 
of  collecting  debts. 

Whenever  there  are  two  or  more  classes  of  stock,  the 
respective  rights  of  each  class  are  fixed  in  the  charter. 
The  holders  of  shares  in  any  class  have  the  right  to  div- 
idends as  they  are  declared,  but  as  individuals  they  have 
no  right,  on  account  of  owning  a  superior  class  of  stock, 
to  compel  the  directors  to  authorize  a  dividend.  For 
example,  the  holder  of  7  per  cent  cumulative  preferred 
stock  has  no  legal  right  to  a  dividend  at  all  except  when 
such  is  duly  authorized  by  the  board  of  directors.  In 
this  respect  all  classes  of  stockholders  are  in  the  same 
relative  position. 


130  Organizing  a  Business 

RIGHT  TO  ASSETS 

At  the  dissolution  of  a  corporation,  whether  by  limita- 
tion, by  legislative  act,  or  by  insolvency,  the  stockholders 
have  the  right  individually  to  share  proportionately  in 
the  assets  after  all  debts  for  which  the  corporation  is 
legally  liable  are  satisfied.  This  is  the  rule  where  there  is 
one  class  of  stock  only.  Where  there  is  preferred  stock 
as  well  as  common  stock,  it  is  usually  provided  by  statute 
that  the  preferred  stock  must  be  paid  in  full  before  any 
distribution  can  be  made  to  the  general  or  common  stock- 
holders. Such  is  the  New  Jersey  law.  It  is  usually  pos- 
sible to  provide  in  the  charter  that  preferred  stock  may 
be  preferred  as  to  dividends  only,  and  that  in  this  case  it 
shall  share  the  assets  equally  with  the  common  stock 
when  the  corporation  is  dissolved.  In  such  cases  all 
stockholders  have  the  right  to  share  equally  in  the  assets 
of  the  corporation. 

Liabilities  of  Stockholders 

In  general,  stockholders  are  free  from  any  personal  lia- 
bility for  debts  due  the  creditors  of  a  corporation.  This 
principle  was  adopted,  as  has  been  shown  in  an  earlier 
section,  as  a  result  of  the  recognition  of  the  personality 
of  the  corporation.  It  involves  a  complementary  prin- 
ciple, namely,  that  each  share  of  stock  shall  be  paid  for 
in  full  at  the  inception  of  the  company  and  that  the  assets 
shall  have  been  maintained  intact  since  organization. 

LIABILITY  FOR  UNPAID  BALANCES 

It  is  not  unusual,  however,  for  a  corporation  to  provide 
for  the  issuance  of,  for  example,  $10,000,000  worth  of 
capital  stock  and  to  begin  business  on  one-fourth  of  that 
amount  by  calling  for  25  per  cent  only  of  the  face  value 
of   the    stock   issued,    specifying    that    the    remainder, 


Rights  and  Obligations  131 

namely,  75  per  cent,  may  be  paid  in  installments  or  upon 
call  by  the  board  of  directors.  In  such  cases  the  indi- 
vidual stockholder  is,  of  course,  liable  for  the  unpaid 
balance  to  satisfy  the  claims  of  the  creditors. 

A  more  complicated  case  arises  where  the  same  condi- 
tion exists  with  this  exception :  That  the  stock  so  issued 
is  subject  to  no  further  calls  for  payment,  but  is  called 
full-paid  and  non-assessable.  Here  the  corporation  can- 
not by  its  own  vote  assess  outstanding  stock,  but  if  in  the 
course  of  business  it  incurs  indebtedness  in  excess  of  its 
corporate  assets,  it  is  the  duty  of  the  courts  to  compel 
the  individual  stockholders  to  pay  up  in  full  or  as  much 
thereof  as  is  needed  to  pay  all  just  obligations. 

Where  the  stock  is  paid  for  in  cash  or  its  equivalent, 
the  case  is  a  clear  one  and  presents  no  difficulties.  Where, 
however,  as  so  often  occurs,  part  of  the  stock  is  issued  in 
exchange  for  property  whose  value  is  not  well  established, 
the  application  of  this  principle  is  exceedingly  perplex- 
ing. Suppose,  for  example,  a  partnership  has  outgrown 
the  proper  limitations  of  this  form  of  business  organiza- 
tion, and  is  converted  into  a  corporation.  The  partners 
become  stockholders  and  issue  stock  to  themselves  against 
their  former  partnership  interests.  The  value  of  the 
partnership  property  may  be  difficult  to  ascertain,  and 
the  stock  issued,  as  it  appears,  may  be  in  excess  of  the 
real  value  of  the  property.  Conditions  may  change ;  the 
business  may  become  unprofitable  and  bankruptcy  may 
follow.  The  claims  of  the  creditors  exceed  the  selling 
value  of  the  assets  and  either  the  creditors  must  lose  or 
the  stockholders  must  be  assessed  by  the  courts  to  make 
up  the  deficit.  The  question  then  turns  upon  the  valuation 
of  the  assets  and  the  relation  of  such  valuation  to  the 
amount  of  stock  issued. 

Such  cases,  where  no  fraud  in  valuation  was  originally 


132  Organizing  a  Business 

intended,  present  unusual  difficulties,  and  have  led  to  the 
adoption  of  the  clause  in  the  New  Jersey  statute  provid- 
ing that  where  stock  is  issued  for  property,  in  the  absence 
of  actual  fraud  in  the  transaction,  the  judgment  of  the 
directors  as  to  the  value  of  the  property  purchased  shall 
be  conclusive. 

DIVIDENDS  OUT  OF  ASSETS 

Even  where  the  stock  issued  at  the  organization  of  the 
corporation  was  paid  for  in  full,  it  is,  of  course,  possible, 
by  paying  dividends  out  of  the  capital  assets,  to  create  a 
real  deficit  and  thus,  in  cases  of  insolvency,  defraud  the 
creditors,  unless  either  the  stockholders  or  the  directors 
or  both  can  be  held  liable  for  the  amount  thus  diverted  to 
the  stockholders.  Where  the  accounts  are  accurately  and 
honestly  kept,  the  declaration  and  payment  of  such  a 
dividend  would,  of  course,  show  upon  the  books  and  the 
prospective  creditors  could,  if  they  had  access  to  such 
accounts,  make  allowance  for  the  deficit;  but  usually 
where  such  dividends  are  declared  the  accounts  are 
"doctored"  so  that  the  true  condition  of  the  corpora- 
tion's finances  are  concealed. 

To  illustrate  this  situation,  let  us  assume  that  a  corpo- 
ration is  engaged  in  mining  copper.  Its  deposits  of 
copper  are  estimated  to  be  worth  $8,000,000  and  its  plant 
$2,000,000.  It  has  outstanding  $10,000,000  in  par  value 
of  capital  stock.  After  operating  for  a  year  it  has  taken 
out  one-eighth  of  its  entire  copper  deposits  and  has, 
after  paying  expenses,  $1,000,000  in  cash.  Its  correct 
financial  status  at  this  time  is  shown  in  the  following : 


Rights  and  Obligations  133 

Balance  Sheet — Company  I 

BEFORE  INFLATING  ASSETS 

Assets  Liabilities 

Copper  ore $  7,000,000      Capital  stock $10,000,000 

Plant  and  machinery 2,000,000 

Cash 1,000,000 


$10,000,000  $10,000,000 


Having  cash  in  the  treasury,  the  directors  may  declare 
a  dividend,  though  it  is  evident  that  it  must  be  paid  out  of 
assets  rather  than  out  of  profits.  Disliking  to  acknowl- 
edge the  real  condition  of  affairs,  the  directors  declare  a 
dividend  of  8  per  cent  and  at  the  same  time  inflate  the 
assets  by  $1,000,000.  The  financial  condition  of  the  com- 
pany after  this  adjustment  has  been  made  is  shown  in  the 
following : 

Balance  Sheet — Company  I 

AFTER   INFLATING  ASSETS   AND  DECLARING   DIVIDEND 

Assets  Liabilities 

Copper  ore $  7,500,000  Capital  stock $10,000,000 

Plant  and  machinery 2,500.000  Dividend  No.  1 800,000 

Cash     1,000,000  Surplus    200,000 


$11,000,000  $11,000,000 


Assuming  that  the  stockholders  have  the  right  to  ex- 
amine the  books  or  that  full  accounts  are  published  and 
distributed  among  them,  the  conclusion  reached  by  the 
average  stockholder  will  be  somewhat  as  follows:  The 
company  has  taken  out  $500,000  worth  of  ore  and  has 
sold  it  at  prices  netting  $1,000,000  after  paying  operating 
expenses.  At  the  same  time  the  plant  and  the  machinery 
have  been  improved  by  the  expenditure  of  $500,000.  A 
dividend  of  8  per  cent  then  distributes  only  four-fifths  of 
the  net  income  for  the  year.     This  condition  is  highly 


134  Organizing  a  Business 

gratifying  to  the  stockholders  and  they  accept  the  divi- 
dend declared  and  compliment  the  management. 

Let  us  suppose  this  process  is  continued  for  several 
years  and  the  stock  of  ore  begins  to  show  exhaustion. 
Every  ton  mined  is  encumbered  with  an  increased  cost  of 
production  and  when  the  ore  is  exhausted  the  plant  is 
likely  to  be  practically  worthless.  If,  during  this  period, 
debts  are  allowed  to  accumulate,  the  creditors  find  them- 
selves secured  by  an  empty  mine  and  a  plant  whose  value 
is  dependent  upon  the  value  of  the  remaining  ore  de- 
posits. It  is  plain,  therefore,  that  the  creditors  cannot 
have  their  claim  satisfied  through  the  sale  of  the  assets. 
Who,  then,  ought  to  make  such  claims  good?  Clearly  the 
directors  who  have  been  declaring  dividends  out  of  the 
assets,  and  since  the  stockholders  constitute  the  corpora- 
tion and  are  liable  for  the  election  of  the  directors  and 
have,  at  the  same  time,  been  receiving  the  assets  in  the 
form  of  dividends,  they  should  pay  such  just  debts  rather 
than  shift  them  upon  those  business  enterprises  from 
which  they  have  been  purchasing  materials  and  receiving 
credit. 

Recognizing  the  equity  of  this  principle,  the  legisla- 
tures and  the  courts  in  the  United  States  have  generally 
prescribed  by  law  and  judicial  decision  that  stockholders 
are  liable  to  creditors  of  the  corporation  when  insolvency 
is  caused  by  the  payment  of  dividends  out  of  the  assets. 
And  this  is  the  general  rule  even  though  the  stockhold- 
ers have  themselves  been  deceived  as  to  the  real  condi- 
tion of  the  finances  of  the  company. 

The  stockholders  are  also  individually  liable  to  the 
creditors  of  the  company  where  a  similar  financial  condi- 
tion has  been  brought  about  in  a  more  formal  way, 
namely,  by  reducing  the  amount  of  the  capital  stock  and 
distributing  a  proportionate  part  of  the  assets  to  the  in- 


Rights  and  Obligations  135 

dividual  shareholders.  The  principle  involved  in  all 
these  cases  is  one  and  the  same.  The  individual  stock- 
holder is  freed  from  liability  for  debts  only  upon  condi- 
tion that  the  par  value  of  stock  is  represented  by  actual 
assets  of  equal  value  throughout  the  life  of  the  corpora- 
tion and  so  long  as  any  unsatisfied  creditors  are  in 
existence. 

SPECIAL   LIABILITIES 

In  some  of  the  states,  notably  New  York,  Indiana,  North 
Dakota,  Pennsylvania,  South  Dakota,  and  Tennessee, 
special  consideration  is  shown  the  employe  by  permitting 
him  to  recover  directly  from  the  individual  stockholders 
wherever  he  is  unable  to  obtain  from  the  corporation 
itself  payment  for  service  rendered.  In  some  states 
all  corporations  formed  under  the  general  act  are 
included.  In  others  only  mining,  manufacturing,  and 
other  industrial  corporations  are  subject  to  this  rule.  In 
two  of  the  states,  California  and  Minnesota,  all  stock- 
holders are  subject  to  a  double  liability,  as  are  stock- 
holders in  the  national  banking  corporations  formed  un- 
der federal  law. 

In  this  instance  the  principle  of  limited  liability  is 
only  partially  adopted.  Each  stockholder  is  liable  not 
only  for  the  par  value  of  his  stock,  but  for  any  additional 
amount  equal  to  such  par  value. 

The  liability  of  a  stockholder  may  be  summarized  as 
follows : 

1.  Liability  to  the  corporation  or  to  unsatisfied  credi- 
tors for  unpaid  installments  on  part  paid  stock. 

2.  Liability  to  unsatisfied  creditors  of  a  corporation  in 
case  dividends  have  been  paid  out  of  capital  assets. 

3.  Liability  to  employes  of  a  corporation  for  wages 
due  them. 

10 


136  Organizing  a  Business 

4.  Double  liability  for  the  debts  of  national  banks, 
many  state  banks,  and  also  industrial  corporations  in- 
corporated in  California  and  Minnesota. 

5.  Liability  to  the  amount  of  his  investment  in  a  cor- 
poration for  the  claims  of  unsatisfied  creditors. 

A  stockholder,  upon  the  dissolution  of  a  corporation, 
has  no  right  to  a  share  in  the  assets  until  all  debts  of  the 
corporation  have  been  paid. 

Rights  of  Ckeditoes 

Every  business  enterprise,  whatever  the  form  of  or- 
ganization, is  constantly  using  capital  and  labor  fur- 
nished on  credit  by  investors,  other  business  enterprises, 
and  workmen.  Consequently  the  rights  of  such  creditors 
are  of  considerable  importance  to  the  corporation.  A  part 
of  the  creditors  are  usually  secured  by  the  pledge  of  cer- 
tain definite  portions  of  the  assets.  The  remainder  are 
secured  only  by  claims  upon  the  general  assets.  In  gen- 
eral the  employes  take  precedence  over  all  other  classes 
of  unsecured  creditors,  and  in  some  of  the  states,  as  noted 
above,  may  even  collect  from  the  stockholders  of  the  cor- 
poration when  unable  to  do  so  from  the  corporation 
itself. 

The  rights  of  creditors  become  of  special  importance 
in  cases  of  insolvency.  Under  such  circumstances  their 
claims  may  be  satisfied  in  full  by  the  contribution  of 
additional  capital  on  the  part  of  those  holding  the  con- 
tingent interest,  or  such  creditors  may  become  either 
bondholders  or  stockholders  or  both  in  the  reorganized 
company,  as  the  case  may  seem  to  warrant.  So  long  as 
their  claims  are  paid  when  due,  the  creditors,  like  the 
bondholders,  have  no  right  to  interfere  in  anv  way  in 
the  management  of  the  enterprise. 


Rights  and  Obligations  137 

TEST  QUESTIONS 

1.  What  are  the  chief  rights  of  the  bondholders  of  a  corpora- 
tion? 

2.  Why  is  it  considered  better  policy  to  provide  one  or  two 
large  bond  issues  rather  than  a  variety  of  small  ones? 

3.  What  action  may  the  bondholders  take  in  case  the  principal 
or  interest  on  their  bonds  is  not  paid  ? 

4.  How  do  the  rights  of  different  classes  of  bondholders  vary  ? 

5.  Why  are  the  stockholders  of  a  corporation  interested  in 
keeping  the  amount  of  outstanding  bonds  within  a  reasonable 
limit? 

6.  What  are  the  four  chief  rights  of  stockholders  as  a  body  ? 

7.  What  are  the  three  chief  privileges  of  stockholders  as 
individuals  ? 

8.  What  is  meant  by  the  right  of  proxy  ?  Have  you  read  the 
proxy  as  given  in  the  forms? 

9.  Do  you  understand  fully  what  is  meant  by  cumulative  vot- 
ing? Does  the  ballot  given  among  the  forms  make  clearer  to  you 
this  method  of  voting  ? 

10.  What  does  the  expression  "cutting  a  melon"  mean  on  Wall 
Street? 

11.  Who  has  the  right  to  declare  dividends  in  a  corporation? 

12.  How  does  a  stockholder  secure  his  knowledge  of  the  financial 
condition  of  his  firm? 

13.  Under  what  circumstances  is  a  stockholder  individually 
liable  for  the  debts  of  a  corporation  ? 


CHAPTER  IX 
officers  and  directors  of  a  corporation 

The  Directors 

The  directors  of  a  corporation,  being  at  the  same  time 
stockholders,  are,  in  their  latter  capacity,  subject  to  all 
of  the  liabilities  and  possess  all  of  the  rights  which  be- 
long to  the  latter  body.  In  their  capacity  as  directors  of 
the  corporation,  however,  they  act  as  the  chosen  leaders 
of  the  stockholders  of  the  corporation  in  managing  its 
affairs,  and  on  this  account  possess  certain  additional 
rights  and  are  subject  to  certain  additional  liabilities 
which  need  enumeration  and  explanation. 

The  duties  of  the  directors  are  stated  in  a  general  way 
in  the  corporation  acts  of  the  several  states.  They  are 
further  enumerated  in  the  charter  or  in  the  by-laws, 
usually  the  latter.  They  are  denned  at  length  in  the  judi- 
cial decisions  that  have  been  handed  down  from  time  to 
time  by  the  English  and  American  courts.  In  general 
the  duties  of  the  directors  of  a  corporation  are  as  follows : 

1.  To  manage  the  business  affairs  of  the  corporation. 

2.  To  arrange  for  meetings  of  the  stockholders  and 
to  furnish,  when  required  by  the  state  laws  or  the  by- 
laws, annual  reports  showing  the  financial  condition  of 
the  corporation. 

3.  To  fill  vacancies  in  their  own  number,  such  appoint- 
ments to  hold  until  the  next  meeting  of  the  stockholders. 

THE   DIRECTORS   AS   MANAGERS 

The  Illinois  corporation  act  states  that  "the  corporate 
powers  shall  be  exercised  by  a  board  of  directors  or  man- 

138 


Officers  and  Directors  139 

agers. "  Beyond  providing  that  the  directors  may  adopt 
by-laws  for  the  government  of  its  officers  and  the  affairs 
of  the  company,  requiring  them  to  keep  correct  books  of 
account  of  all  the  business,  and  specifying  the  penalties 
for  declaring  dividends  out  of  capital,  the  manner  in 
which  they  may  exercise  such  corporate  powers  is  left 
largely  to  the  board,  subject,  of  course,  to  the  jurisdiction 
of  the  courts. 

The  New  Jersey  statute  is  quite  similar,  providing  that 
"the  business  of  every  corporation  shall  be  managed  by 
its  directors."  Vice  Chancellor  Green,  of  New  Jersey, 
in  the  case  of  Ellerman  v.  Chicago  Junction  Railways, 
etc.,  Co.,1  said: 

Individual  stockholders  cannot  question,  in  judicial  proceed- 
ings, corporate  acts  of  directors  if  the  same  are  within  the  powers 
of  the  corporation,  and,  in  furtherance  of  its  purposes,  are  not 
unlawful  or  against  good  morals,  and  are  done  in  good  faith  and 
in  the  exercise  of  an  honest  judgment.  Questions  of  policy  of 
management,  of  expediency  of  contracts  or  action,  of  adequacy 
of  consideration  not  grossly  disproportionate,  of  lawful  appro- 
priation of  corporate  funds,  are  left  solely  to  the  honest  decision 
of  the  directors  if  their  powers  are  without  limitation  and  free 
from  restraint.  To  hold  otherwise  would  be  to  substitute  the 
judgment  and  discretion  of  others  in  the  place  of  those  deter- 
mined on  by  the  scheme  of  incorporation. 

As  managers  of  the  corporation,  then,  the  directors, 
under  the  statute  law  and  within  the  limitations  fixed  by 
the  charter  and  by-laws,  are  authorized  and  expected  to 
organize  the  operating  departments  of  the  business,  to 
employ,  supervise,  and  discharge  all  officers  and  work- 
men, to  keep  full  and  correct  books  of  account,  to  outline 
in  a  general  way  the  financial  policy  and  business  activi- 
ties of  the  corporation,  to  determine  the  net  earnings  of 

i  49  New  Jersey  Equity. 


140  Organizing  a  Business 

the  company  annually,  and  to  declare  the  same  in  divi- 
dends or  reinvest  the  surplus  in  improvements  where 
such  policy  is  permitted  by  the  state  laws,  and  in  general 
to  exercise  the  same  supervision  over  the  affairs  of  the 
company  as  an  individual  proprietor  would  over  his  own 
property.  In  its  management,  however,  the  directors 
are  required  to  act,  not  as  individuals,  but  as  a  single 
body.  All  important  questions  of  business  policy  and  all 
important  contracts  must  come  before  them  for  consid- 
eration and  action  at  regular  or  special  meetings.  Mat- 
ters of  routine  may,  of  course,  after  the  general  policy 
has  been  determined,  be  entrusted  to  the  proper  officers 
to  be  carried  into  execution. 

The  three  really  important  functions  of  the  directors 
as  managers  are:  (1)  to  organize  the  business  into  de- 
partments, select  or  approve,  on  recommendation  of  a 
committee,  the  heads  of  such  departments,  and  authorize 
the  appointment  of  assistants  and  the  employment  of 
workmen;  (2)  to  determine,  in  a  general  way,  the  activi- 
ties of  the  corporation,  requiring  all  important  contracts 
and  questions  of  business  policy  to  come  before  them  for 
direct  action,  but  giving  heads  of  departments  consider- 
able liberty  in  the  execution  of  the  general  policies  es- 
tablished by  them ;  such  liberty  of  action  will  generally  be 
exercised  without  abuse,  provided  full  reports  are  sub- 
mitted regularly  to  the  directors;  and  (3)  to  determine 
the  dividend  policy  of  the  corporation. 

The  first  two  of  the  above  functions  will  be  treated  at 
length  in  the  companion  volume  on  Industrial  Organiza- 
tion and  Management.  The  third  function  requires  fur- 
ther treatment  here. 

(1)  The  Dividend  Policy  of  Directors 
It  has  been  said  that  a  corporation  is  created  for  the 
purpose  of  earning  profits  and  dividing  the  same  among 


Officers  and  Directors  141 

the  stockholders  in  the  form  of  dividends.    In  the  case  of 
business  corporations  this  is  undoubtedly  true,  but  as 
shown  above,  it  is  sometimes  better  business  policy  to 
withhold  dividends  for  a  period  of  years  and  use  the  sur- 
plus earnings  for  improvement  of  plant  or  machinery 
or  for  the  extension  of  the  activities  of  the  company 
rather  than  to  distribute  the  profits  annually.    Which  of 
these  two  policies  is  better  depends  largely  upon  condi- 
tions that  vary  in  specific  cases.    Hence  every  corpora- 
tion presents  a  separate  and  distinct  problem,  but  the 
following  may  be  laid  down  as  a  general  principle.     In 
a  country  rapidly  developing  from  the  technical  and  in- 
dustrial point  of  view  every  business  enterprise  is  likely 
to  need  for  the  most  efficient  operation  more  and  more 
capital,  a  larger  and  larger  plant  or  plants,  and  more 
expensive  machinery,  as  the  years  go  by.     If  all  of  the 
annual  earnings  are  distributed  annually  to  the  share- 
holders, the  enterprise  will  become  less  and  less  efficient 
relatively,  and  in  the  course  of  time  insolvent.    To  avoid 
this  unfortunate  contingency,  additional  capital  must  be 
invested  in  the  enterprise.    Such  additional  capital  may 
come  from  outside  sources  or  from  those  who  now  hold 
the  stock.     If  the  enterprise  is  a  prosperous  one,  those 
now  holding  its  shares  will  naturally  wish  to  furnish  the 
new  capital  and  thus  continue  to  control  it.     They  may 
accomplish  their  purpose  either  by  declaring  all  the  earn- 
ings in  dividends  annually  and  increasing  the  capital 
stock  as  needed  or  by  foregoing  dividends  and  using  the 
surplus  to  improve  the  plant.    As  the  former  of  the  two 
processes  is  attended  with  more  or  less  expense,  it  is 
often  better  policy  to  adopt  the  latter  course. 

To  forego  dividends,  however,  even  for  a  period,  has 
one  disadvantage.  It  is  particularly  unfortunate  for 
those  shareholders  who  depend  on  their  dividends  for  a 


142  Organizing  a  Business 

whole  or  a  part  of  their  annual  living  expenses.  The  di- 
rectors, therefore,  in  determining  upon  a  dividend  policy, 
ought  to  take  into  consideration  the  character  of  the 
stockholders  and  the  effect  of  withholding  the  annual 
earnings  upon  those  who  need  such  income  to  meet  their 
own  living  expenses.  While  the  policy  of  withholding 
dividends  for  the  purpose  of  improving  the  plant  may 
thus  be  defensible  from  the  standpoint  of  the  corporate 
enterprise,  it  may  be  harmful  to  the  welfare  of  a  consid- 
erable portion  of  its  shareholders. 

On  the  other  hand,  the  directors  may  adopt  the  policy 
of  declaring  dividends  in  excess  of  the  actual  earnings, 
concealing  the  practice  by  padding  the  assets.  Such  prac- 
tice is  usually  forbidden  by  statute  law  and  by  the  by- 
laws of  every  respectable  company,  and  it  is  further  dis- 
couraged by  making  the  directors  liable  to  the  creditors 
for  any  loss  sustained  thereby.  This  penalty,  however, 
does  not  protect  the  interests  of  the  stockholders  whose 
future  prospects  may  in  this  way  be  partially  or  wholly 
ruined. 

(2)  Manipulations 

It  has  been  assumed  in  the  foregoing  discussion  that 
the  directors,  in  deciding  their  policy,  have  the  best  inter- 
ests of  the  company  at  heart.  It  will  be  evident  on  reflec- 
tion, however,  that  the  power  to  declare  or  withhold 
dividends  may  be  used  for  illegitimate  purposes,  among 
which  that  of  causing  fluctuations  in  the  price  of  the  stock 
is  the  most  pernicious.  It  has  been  noticed  that  one  of 
the  advantages  of  the  corporation  is  the  ready  transfer- 
ability of  its  shares.  To  facilitate  such  transfers,  stock 
exchanges  are  established  and  maintained  in  the  larger 
cities.  The  stock  of  each  corporation  of  public  impor- 
tance is  being  regularly  bought  and  sold  on  the  exchanges 


Officers  and  Directors  143 

or  on  the  curb  which  grows  up  about  the  exchanges  and 
one  of  the  important  criterions  by  which  the  price  of  the 
stock  is  governed  is  the  dividend  rate.  To  increase  this 
rate  causes  an  advance  in  the  selling  price  of  the  stock. 
To  lower  the  rate,  the  reverse.  And  this  is  true  even 
though  such  changes  in  the  dividend  rate  bear  no  direct 
relationship  to  the  annual  earning  rate  of  the  company. 
Consequently  the  board  of  directors  may  withhold  divi- 
dends or  reduce  the  rate  even  where  the  earning  power 
is  unchanged,  and  thus  cause  the  stock  to  sell  at  a  lower 
price.  Later  they  may  increase  the  rate  and  cause  an  ad- 
vance in  price.  They  may,  as  individuals,  purchase  the 
stock  when  it  is  selling  at  a  low  price  and  sell  it  later 
when  it  is  going  at  a  higher  price. 

The  directors  may,  by  changing  the  dividend  rate, 
cause  variations  in  the  price  of  stock  and  take  advantage 
of  their  own  action  as  directors  to  enrich  themselves  as 
individuals  at  the  expense  of  the  other  stockholders. 
Such  practices,  while  not  sanctioned  in  the  better  cor- 
porations, have  been  altogether  too  common  in  American 
corporation  finance  to  be  overlooked.  Since  the  directors 
are,  under  ordinary  circumstances,  permitted  by  law  to 
declare  dividends  when  and  at  what  rate  they  see  fit,  the 
only  effective  safeguard  in  the  hands  of  the  stockholders 
is  the  power  to  change  the  directors  at  the  annual 
elections. 

THE    DIRECTORS    AND    THE    STOCKHOLDERS 

A  second  function  of  the  directors  is  to  arrange, 
through  the  proper  officers,  for  the  regular  meetings  of 
the  stockholders  and  see  that  matters  properly  coming 
before  them  are  presented  in  an  orderly  way  and  that  the 
action  taken  is  correctly  recorded  and  faithfully  carried 
into  effect.    In  some  states  it  is  provided  by  statute,  and 


144  Organizing  a  Business 

in  most  corporations  by  the  by-laws,  that  the  directors 
shall  keep  accurate  books  of  account  showing  correctly 
and  fully  the  transactions  of  the  company.  In  some 
states  it  is  made  the  duty  of  the  directors  to  see  that 
stockholders  have  access  to  the  books  during  business 
hours.  In  the  by-laws  of  many  corporations  it  is  also 
provided  that  a  summarized  statement  of  the  results  of 
the  business  in  the  form  of  an  annual  balance  sheet  show- 
ing the  assets  and  liabilities  properly  arranged  and  an 
income  account  showing  the  annual  income  and  outgo,  be 
published  and  distributed  to  the  stockholders  at  or  before 
the  annual  meeting. 

THE    DIRECTORS    AND    VACANCIES 

The  directors  may  ordinarily  fill  vacancies  in  their  own 
number,  such  appointments  to  hold  until  the  next  regular 
meeting  of  the  stockholders.  The  stockholders  may,  in 
the  by-laws,  provide  for  any  other  method  of  filling  va- 
cancies or  may  permit  such  vacanies  to  remain  until  the 
regular  meeting  for  the  election  of  officers.  Usually  a 
director  cannot  be  removed,  either  by  the  board  or  by  the 
stockholders,  unless  provision  for  such  action  is  made  in 
the  charter.  In  some  states,  however,  a  director  may  be 
removed  for  misconduct  in  office  by  action  at  law  insti- 
tuted through  the  office  of  the  attorney-general  of  the 
state. 

LIABILITIES    OF    DIRECTORS 

The  directors  of  a  corporation  in  their  capacity  as  the 
organized  administrative  board  in  charge  of  its  business 
affairs  are  trustees  for  the  stockholders  and  are  ex- 
pected to  use  discretion  in  the  management  of  its  affairs, 
to  conform  to  the  law  of  the  states  and  to  the  pro- 
visions of  the  charter  and  the  by-laws.  So  long  as  they 
observe  the  above  requirements  they  are  free  to  act  in 


Officers  and  Directors  145 

good  faith  according  to  their  own  judgment.  If,  how- 
ever, they  fail  to  conduct  the  corporate  business  in  ac- 
cordance with  the  above  conditions,  they  are  ordinarily 
subjected  to  personal  liabilities  for  certain  specific  acts, 
of  which  the  following  are  the  more  important : 

1.  For  declaring  dividends  except  out  of  the  surplus 
profits. 

2.  For  issuing  stock  as  fully  paid  when  in  fact  it  is 
only  partly  paid  for. 

3.  For  disobedience  to  the  laws  of  the  state  or  states 
in  which  the  company  is  operating. 

4.  For  failure  to  exercise  reasonable  care  and  good 
faith  in  the  management  of  the  affairs  of  the  corporate 
business. 

(l)  Liability  for  Illegal  Dividends 

As  it  is  the  function  of  the  directors  to  declare  div- 
idends, so  it  is  their  duty  to  use  discretion  in  such  action 
and  to  make  distribution  to  the  stockholders  only  out  of 
the  surplus.  For  this  reason,  among  others,  they  are 
required  to  keep  accurate  books  of  accounts  in  order  that 
they  may  be  satisfied  that  any  distribution  in  the  form  of 
dividends  will  not  impair  the  solvency  of  the  corporation. 
The  Illinois  corporate  act  is  especially  explicit  upon  this 
point.    It  states: 

If  the  directors  or  other  officers  or  agents  of  any  stock  corpora- 
tion shall  declare  and  pay  any  dividend  when  such  corporation 
is  insolvent,  or  any  dividend  the  payment  of  which  would  render 
it  insolvent,  or  which  would  diminish  the  amount  of  its  capital 
stock,  all  directors,  officers  or  agents  assenting  thereto  shall  be 
jointly  and  severally  liable  for  all  the  debts  of  such  corporation 
then  existing,  and  for  all  that  shall  thereafter  be  contracted  while 
they  shall,  respectively,  continue  in  office. 


146  Organizing  a  Business 

The  New  Jersey  act  is  essentially  the  same,  with  the 
provision  that  any  director  who  was  absent  at  the  time 
the  dividend  was  declared  or  who  dissented  from  the 
action  when  it  was  taken,  may  exonerate  himself  from  the 
liability  by  causing  his  dissent  to  be  entered  at  large  on 
the  minutes  or  by  publishing  notice  of  his  dissent  in  a 
newspaper  in  the  county  where  the  corporation  has  its 
principal  office.  The  directors,  then,  being  responsible 
for  the  declaration  of  dividends  which  have  not  been 
earned,  are  thus  in  the  first  instance  held  liable,  jointly 
and  individually,  for  losses  caused  the  creditors  of  the 
corporation.  Accordingly  the  stockholders  who  ulti- 
mately are  liable  for  such  distribution  of  the  assets  are 
ordinarily  protected  from  loss  through  the  prior  liabil- 
ity of  the  directors. 

(2)  Liability  for  Stock  Issues 

In  a  similar  way  the  directors  are  personally  liable  for 
losses  occasioned  by  failure  to  provide  for  the  full  pay- 
ment of  the  stock  at  the  organization  of  the  company. 
This  provision  rests  upon  essentially  the  same  principle. 
Failure  to  pay  for  the  stock  in  full  at  the  organization 
causes  a  deficit  at  the  beginning  of  the  corporate  exist- 
ence. The  declaration  of  dividends  out  of  capital  brings 
about  exactly  the  same  condition  after  the  corporation 
has  been  in  operation.  In  either  case  the  responsibility 
is  rightly  thrown  upon  the  directors  who  are  entrusted 
with  the  management  of  the  corporate  affairs. 

(3)  Liability  for  Violating  Laws 

In  the  third  case  the  situation  is  somewhat  different. 
The  stockholders,  having  no  voice  in  the  ordinary  affairs 
of  the  corporation,  are  not  in  a  position  to  know  whether 
the  laws  are  being  observed  or  violated.     The  directors 


Officers  and  Directors  147 

are.  Hence  any  loss  sustained  by  the  corporation  on  this 
account  is  properly  thrown  on  the  directors.  It  is  thus 
their  duty  to  know  the  legal  conditions  under  which  the 
corporation  is  operated  and  to  see  that  its  business  is 
conducted  in  a  lawful  manner.  For  this  purpose,  all  cor- 
porations need  the  advice  of  competent  legal  counsel  and 
the  larger  ones  make  the  legal  department  an  essential 
part  of  the  corporate  organization. 

(4)  Liability  for  Breach  of  Trust 

The  fourth  case  presents  greater  difficulties  in  prac- 
tice, although  it  is  in  theory  entirely  in  accordance  with 
the  principles  of  corporate  management.  Directors  are 
chosen  for  two  purposes:  (1)  because  it  is  impracticable 
for  the  whole  body  of  stockholders  in  a  corporation  of 
considerable  size  to  participate  in  its  management; 
hence  its  management  is  entrusted  to  a  selected  few; 
(2)  it  is  ordinarily  expected  that  by  selecting  a  few  of  the 
stockholders  to  act  as  managers  of  the  company,  a  higher 
order  of  business  capacity  and  judgment  may  be  secured. 
It  is  on  the  second  of  these  two  propositions  that  the  re- 
quirement that  the  directors  must  exercise  reasonable 
care  and  good  faith  in  the  conduct  of  the  corporate  busi- 
ness rests.  Having  been  selected  as  the  chosen  few  on 
account  of  their  superior  business  ability,  the  directors 
are  properly  held  individually  liable  for  indiscretion  in 
business  policy  and  for  fraud  in  actual  transactions. 

The  enforcement  of  this  principle  of  corporate  man- 
agement is  full  of  difficulties.  It  is  not  easy  to  determine 
in  advance  the  wisdom  of  all  questions  of  business 
policy;  and  to  throw  the  burden  for  losses  upon  the  di- 
rectors when  they  aoted  in  good  faith  would  hardly  ap- 
peal to  the  courts  of  equity.  Consequently,  it  is,  as  a 
matter  of  fact,  only  in  cases  of  actual  fraud  that  direct- 


148  Organizing  a  Business 

ors  are  ordinarily  held  liable.  Here  the  case  is  clearer. 
It  is  sometimes  impossible  to  determine  where  the  re- 
sponsibility lies  even  in  such  cases,  but  usually  the  courts 
have  been  able  to  determine  the  facts  and  in  many  such 
cases  to  hold  the  guilty  directors  responsible  for  their 
fraudulent  actions.  Owing  to  the  difficulty  in  proving 
fraud,  it  is  ordinarily  provided  that  a  director  may  not 
participate  in  corporate  action  in  case  of  contracts  in 
which  he  is  personally  interested.  In  view  of  the  diffi- 
culties involved  in  the  enforcement  of  the  liability  to 
which  directors  are  subjected  for  mismanagement  and 
fraud,  it  is  undoubtedly  true,  as  has  so  often  been  said, 
that  the  best  safeguard  of  shareholders  lies  in  the  choice 
of  an  experienced  and  honest  board  of  trustees. 

The  Corporate  Officers 

The  officers  of  a  corporation  may  be  divided  into  two 
classes,  dependent  upon  their  relationship  to  the  corpo- 
rate organization.  The  first  class  includes  those  whose 
duties  are  intimately  connected  with  the  internal  affairs 
of  the  corporation,  the  second  class  those  whose  duties 
are  connected  with  its  external  operations.  Since  we  are 
now  considering  the  organization  of  the  internal  affairs 
of  the  corporation,  the  duties  of  the  officers  included 
within  the  first  class  will  be  treated  here. 

As  already  noticed,  certain  of  the  officers  of  a  corpora- 
tion are  considered  so  necessary  to  its  welfare  that  they 
are  usually  named  in  the  corporation  act  and  their  duties 
there  outlined,  for  the  purpose  of  prescribing  in  detail 
the  responsibilities  of  each  officer.  In  addition,  as  a  re- 
sult of  judicial  decisions,  the  officers  of  a  corporation  are 
subjected  to  various  personal  liabilities  for  failure  to 
perform,  in  a  faithful  and  honest  manner,  the  duties  as- 
signed them.    The  corporate  officers  always  include  the 


Officers  and  Directors  149 

president,  the  vice-president  or  vice-presidents,  the  sec- 
retary, and  the  treasurer.  In  the  more  complex  corpo- 
rations there  are,  in  addition,  a  chairman  of  the  board, 
an  executive  committee,  a  general  counsel,  and  a  comp- 
troller. 

Some  of  the  above  officers,  as,  for  example,  the  secre- 
tary, may  be  entirely  occupied  with  duties  pertaining  to 
the  corporate  organization.  Others  may  serve  in  double 
capacity,  first  as  officers  of  the  corporate  organization, 
and  second  as  officers  of  the  operating  organization.  It 
is  in  the  former  capacity  that  we  are  now  considering 
them.  The  corporate  duties  of  each  of  the  above  officers 
have  been  described  in  the  section  on  the  by-laws.  It  is 
the  purpose  of  this  section  to  enumerate  the  personal  lia- 
bilities to  which  they  are  subjected  for  negligence  or 
wrong-doing  in  connection  with  their  official  duties. 

DUTIES  AND  LIABILITIES  OF  OFFICEES 

In  the  first  place,  under  the  common  law,  officers  of  the 
corporation  are  generally  liable  for  damages  resulting 
from  failure  to  perform  their  duties  properly  or  for 
illegal  action  of  any  kind.  This  subject  is  fully  treated 
in  the  law  of  officers  and  every  officer  of  a  corporation 
should  be  thoroughly  informed  in  regard  to  his  liabilities 
as  well  as  his  duties.  In  the  second  place,  the  corpora- 
tion acts  of  the  several  states  add  certain  specific  liabili- 
ties for  failure  to  perform  certain  prescribed  duties. 

Among  the  more  important  of  these  prescribed  duties 
are  the  following: 

1.  Officers  are  required  to  keep  the  stock  and  transfer 
books  open  for  inspection  during  business  hours. 

2.  Officers  are  not  permitted  to  make  loans  to  any  of- 
ficer or  stockholder. 

3.  Officers  render  themselves  personally  liable  for  all 


150  Organizing  a  Business 

debts  of  a  corporation  created  by  signing  false  certifi- 
cates and  false  notes. 

4.  Officers  signing  false  certificates  render  themselves 
criminally  liable  for  such  action. 

5.  In  some  states  officers  tampering  with  the  entries  in 
books  of  account  and  other  corporate  records  are  de- 
clared guilty  of  forgery  and  subjected  to  the  penalties 
thereof. 

TEST  QUESTIONS 

1.  In  general  what  are  the  three  chief  classes  of  duties  of  the 
directors  of  a  corporation? 

2.  What  are  their  responsibilities  as  managers  of  the  corpora- 
tion? 

3.  What  principles  should  guide  the  board  of  directors  in  de- 
termining upon  their  dividend  policy? 

4.  What  are  the  four  chief  classes  of  liability  of  the  directors 
of  a  corporation? 

5.  Is  it  necessary  to  examine  the  corporation  laws  of  a  state  in 
determining  upon  the  number  and  kinds  of  officers  to  include  in 
the  corporate  organization? 

6.  How  do  the  officers  of  a  corporation  secure  their  positions? 

7.  What  five  important  duties  fall  upon  the  officers  of  a  cor- 
poration ? 


/ 


CHAPTER  X 
organization  for  operation 

The  Proprietorship  and  the  Operating  Organization 

The  nature  of  the  ownership,  whether  an  individual 
proprietor,  a  partnership,  or  a  corporation,  determines 
in  a  general  way  the  chief  characteristics  of  the  internal 
organization  of  any  business  enterprise.  Every  business 
organization  is,  however,  created  for  the  purpose  of  un- 
dertaking some  specific  phase  or  phases  of  the  in- 
dustrial or  commercial  activities  of  the  country  wherein 
it  is  located.  The  nature  of  those  activities,  while  af- 
fecting, as  already  observed,  the  character  of  the  internal 
organization,  is  the  controlling  factor  in  determining  the 
general  features  and,  to  a  somewhat  less  extent,  the  de- 
tails of  the  operating  organization.  For  example  a  cot- 
ton factory  may  be  owned  and  managed  by  an  individual 
proprietor,  by  a  partnership,  by  a  corporation,  or  by  a 
co-operative  society.  The  character  of  the  ownership 
has  almost  no  influence  on  the  working  or  operating  or- 
ganization in  the  factory.  Indeed  the  expert  operative 
might  work  in  either  one  for  years  and  never  know  under 
which  form  of  organization  the  factory  was  operating. 
The  plant  would  show  no  material  difference,  the  ma- 
chinery would  be  practically  identical,  the  operations 
would  be  carried  on  in  the  same  way,  and  the  product 
turned  out  could  not  be  distinguished. 

General  Principles  of  Organization 

The  operating  organization  being  determined  not  by 
the  ownership  but  by  the  character  of  the  work  under- 

151 


152  Organizing  a  Business 

taken,  it  follows  that  there  are  certain  general  principles 
which  underlie  the  organization  of  all  operating  business 
enterprises  and  that  these  general  principles  are  ob- 
served by  all  well-managed  enterprises  without  regard 
to  their  internal  organization.  The  more  important  of 
these  general  principles  are  as  follows : 

1.  The  executive  authority  should  be  centralized  in 
form  and  entrusted  to  one  individual  or  a  small  group  of 
individuals  working  under  definite  responsibility  but  pos- 
sessing considerable  freedom  in  the  choice  of  ways  and 
means. 

2.  The  operations  should  be  subdivided  into  depart- 
ments, each  department  having  a  certain  specific  work  to 
do  and  in  its  work  subject  to  the  general  supervision  of 
the  central  executive  but  being  entirely  independent  of 
every  other  department. 

The  Executive 

In  the  individual  proprietorship  the  executive  ordi- 
narily is  the  proprietor  himself,  although  in  some  cases 
the  proprietor  employs  a  chief  executive  called  a  "gen- 
eral manager"  and  delegates  to  him  the  executive  func- 
tions. In  the  partnership  the  members,  jointly  and  sev- 
erally, usually  act  as  the  chief  executive,  parcelling  out 
the  functions  among  themselves  or  entrusting  such  duties 
to  one  of  their  own  number  designated  as  "managing 
partner."  The  partnership,  however,  may  employ  a 
general  manager  and  thus  relieve  themselves  of  the 
active  duties  of  the  management.  In  the  corporation  the 
executive  function  is  always  exercised  by  a  selected  few, 
sometimes  consisting  of  a  group  of  persons  designated 
as  an  executive  committee,  sometimes  consisting  of  one 
person  under  the  title  of  president.  In  certain  cases 
both  an  executive  committee  and  a  president  are  pro- 


Organization  for  Operation 


153 


vided  for  in  the  organization.  When  such  is  the  case  the 
executive  committee  is  the  supreme  executive  authority 
and  the  president  is  an  officer  of  the  executive  committee, 
carrying  out  its  instructions  in  regard  to  the  general 
policy  and  having  considerable  discretion  in  regard  to 
the  actual  details  of  the  executive  duties. 

The  executive  thus  occupies  an  intermediate  position 
between  the  proprietorship  and  the  business  operations, 
receiving  general  instructions  as  to  policy  from  the  pro- 
prietorship and  issuing  specific  directions  to  the  several 
heads  of  departments  for  the  purpose  of  carrying  out  the 
general  policy  into  practical  results.  This  relationship 
may  be  illustrated  by  the  following  table  which,  in  a 
rough  way,  shows  all  the  component  parts  of  a  complete 
business  organization. 


Ultimate 
Authority 

Individual 
proprietor 


Partnership 


Corporation 


Co-operative 
society 


General 
Policies 

Individual 
proprietor 


Partners 


Stockholders 
and  directors 


Chief 
Executive 

Individual  pro- 
prietor  or 
general  man- 
ager 

Partners,  sever- 
ally, or  man- 
aging partner 

Executive  com- 
mittee  or 
president 


Society  and  the    Executive    com- 
committee  mittee     or 

president 


Departments 

Legal 

Accounting 

Purchasing 

Manufacturing 

Sales 
Transportation 


While  the  character  of  the  chief  executive  varies  with 
the  nature  of  the  proprietorship  and,  to  a  less  extent, 
with  the  size  of  the  business  and  the  scope  of  its  opera- 
tions, in  all  cases  this  office  has  one  feature  in  common, 


154  Organizing  a  Business 

namely,  its  intermediate  position  as  the  medium  through 
which  the  ultimate  authority  finds  expression  in  concrete 
results  through  the  operation  of  the  several  depart- 
ments. 

THE  SINGLE  V.  THE  PLURAL  EXECUTIVE 

Whether  the  executive  shall  be  a  single  head  or  a  group 
of  individuals  acting  as  one,  depends  largely  upon  cir- 
cumstances. In  the  individual  proprietorship  the  exec- 
utive head  ordinarily  is,  as  stated  above,  either  the 
proprietor  himself  or  a  general  manager  under  his  em- 
ployment. While  not  customary,  it  is  possible  for  an 
individual  proprietor  to  entrust  the  executive  duties  con- 
nected with  his  business  to  an  executive  committee  of  the 
usual  size  and  standing  in  the  same  relationship  to  him 
as  the  executive  committee  of  a  corporation  stands  to  the 
stockholders  and  directors. 

The  partnership,  on  the  contrary,  usually  has  a  plural 
executive  head,  all  the  partners  participating  impartially 
in  the  executive  duties.  This  feature  of  the  partnership 
is,  as  is  well  known,  one  of  the  weaknesses  of  this  form 
of  organization  and  this  fault  is  sometimes  corrected  by 
the  appointment  of  one  of  the  partners  as  the  managing 
partner.  The  partners  then,  as  a  body,  formulate  the 
general  policy  and  the  managing  partner  carries  it  into 
execution. 

Formerly  the  corporation  always  had  a  single  execu- 
tive head  in  the  person  of  a  president.  In  recent  years, 
owing  largely  to  the  complexity  of  the  work  conducted 
by  the  greater  corporations,  it  has  been  found  advisable 
to  entrust  the  executive  duties  to  a  committee  selected 
from  the  directors  and  officers  and  to  make  the  president 
the  head  of  this  executive  committee.  The  executive 
committee  then  decides  on  the  more  important  questions 


Organization  for  Operation  155 

of  administration  and  the  president  supervises  and  di- 
rects the  work  of  the  several  departments,  each  of  which, 
under  its  own  staff,  is  actively  engaged  in  the  detailed 
work  of  trade  and  industry.  In  this  respect  the  co- 
operative society  resembles  the  ordinary  corporation. 

For  small  business  enterprises,  whatever  the  character 
of  the  internal  organization,  the  single  executive  head 
possesses  marked  advantages  over  the  plural.  The  sin- 
gle executive  is  able  to  act  promptly  and  thus  take  ad- 
vantage of  opportunities  not  open  to  the  slowly  moving 
executive  committee.  Furthermore  in  the  partnership 
with  several  partners  and  in  the  small  corporation  the 
directors  act  as  an  executive  committee,  not  only  formu- 
lating policies,  but  making  plans  for  their  prompt  and 
efficient  execution.  In  the  larger  corporations  the  ex- 
ecutive committee  system  has  been  adopted  for  two  rea- 
sons: (1)  the  management  of  such  business  enterprises 
is  entirely  beyond  the  capacity  of  any  one  man,  owing 
partly  to  its  physical  extent  and  partly  to  the  variety  of 
operations  conducted;  and  (2)  the  executive  is  obliged  to 
determine  questions  coming  up  daily  of  so  great  moment 
that  they  demand  the  combined  judgment  of  several  men. 
While  in  most  cases  the  decision  of  the  one-man  execu- 
tive would  not  involve  the  company  in  disaster,  it  is  the 
exceptional  instances  that  must  be  guarded  against.  The 
executive  committee  system,  as  compared  with  the  single 
executive,  lacks  somewhat  in  promptness  of  execution 
but  more  than  offsets  this  disadvantage  by  the  uniform 
wisdom  of  its  decisions  on  important  questions  of  busi- 
ness policy  and  business  practice. 

RESPONSIBILITY    TO    THE    PROPRIETORSHIP 

The  chief  executive  is  in  theory,  and  should  be  in  prac- 
tice, either  directly  or  indirectly  responsible  to  the  ulti- 


156  Organizing  a  Business 

mate  authority,  that  is,  to  the  individual  proprietor,  the 
partners,  the  corporation,  or  the  co-operative  society,  as 
the  case  may  be.  In  the  first  two  cases  there  is  ordi- 
narily no  difficulty  in  this  respect.  In  the  corporation 
and  the  co-operative  society,  however,  the  chief  executive 
may,  in  practice,  become  so  far  independent  of  the  au- 
thority to  which  it  is  responsible  as  to  present  entirely 
new  problems  of  business  management.  The  following 
statement  of  Mr.  Jacob  H.  Schiff,  before  the  New  York 
Legislative  Insurance  Investigating  Committee  in  1905,1 
represents  an  extreme  case  and  is  hardly  typical  of  the 
situation  as  a  whole.  Still  it  is  sufficiently  true  to  bear 
repetition.    He  said : 

The  system  of  directorship  in  the  great  corporations  of  the 
City  of  New  York  is  such  that  a  director  has  practically  no 
power ;  he  is  considered  in  many  instances,  and  I  may  say  in  most 
instances,  as  a  negligible  quantity  by  the  executive  officers  of  the 
society ;  he  is  asked  for  advice  when  it  suits  the  executive  officers, 
and  if  under  the  prevailing  system  an  executive  officer  wishes 
to  do  wrong,  or  wishes  to  conceal  anything  from  his  directors, 
or  commits  irregularities,  the  director  is  entirely  powerless;  he 
is  only  used  in  an  advisory  capacity,  and  can  only  judge  of  such 
things  as  are  submitted  to  him.  Directors  are  of  very  little  use 
except  to  comply  with  the  formal  provisions  of  the  law. 

The  accuracy  of  Mr.  Schiff  's  assertion  is  confirmed  by 
the  fact  that  certain  capitalists  occupy  the  position  of 
director  in  as  many  as  sixty  different  corporations, 
while  at  the  same  time  actively  engaged  as  president  or 
manager  of  the  same  or  other  similar  business  enter- 
prises. It  is  apparent  that  where  an  individual  acts  as 
a  director  in  many  enterprises  he  cannot  give  each  of 
them  the  personal  attention  that  is  necessary  to  insure 
the  adoption  of  a  wise  business  policy.    What  more  natu- 

i  Report  page  100C 


Organization  for  Operation  157 

ral,  then,  than  that  he  should  look  to  those  having  a  more 
intimate  knowledge  of  the  company's  affairs  for  guid- 
ance! Thus  the  directors  become  the  servants,  and  some- 
times the  tools,  of  the  executive  officers.  Where  the  ex- 
ecutive officers  are  able  and  honest  administrators,  the 
affairs  of  the  corporation  suffer  no  harm;  but  where,  as 
in  some  cases,  such  persons  are  unwise,  selfish,  or  actu- 
ally dishonest,  the  stockholders  who  assume  that  their 
rights  are  being  guarded  by  the  directors  suffer  the  con- 
sequences in  the  ultimate  wreck  of  the  corporation. 

No  practical  remedy  for  this  condition  has,  as  yet,  been 
proposed.  It  would  seem  unwise  to  hasten  the  consolida- 
tion of  the  corporations  by  limiting  the  number  of  cor- 
porations in  which  a  person  may  hold  directorships  and 
yet  it  might  be  better  to  have  fewer  and  larger  corpora- 
tions if  by  so  doing  a  better  and  more  responsible  man- 
agement could  be  secured.  It  may  prove  advisable  to 
require  directors  to  give  moi;e  personal  attention  to  im- 
portant matters  and  thus  secure,  in  an  indirect  way,  what 
may  not  be  advisable  by  direct  methods.  It  is  true  that 
each  director,  entrusted  as  he  is  with  the  determination 
of  the  important  questions  of  business  policy,  ought  to 
be  informed  in  regard  to  the  financial  condition  of  the 
corporation,  in  regard  to  its  wage  system,  its  treatment 
of  employes,  its  price  policy,  or  its  treatment  of  competi- 
tors, as  well  as  its  earnings  and  dividends.  The  average 
director  is  too  often  content  when  he  finds  the  dividend 
rate  satisfactory  to  himself  and  the  other  stockholders. 

THE  FUNCTIONS  OF  THE  EXECUTIVE 

The  executive  has  two  main  functions:  (1)  to  execute 
the  general  policies  formulated  by  the  proprietors  or  the 
direct  representatives  of  the  proprietors  of  the  enter- 
prise; and  (2)  to  assist  the  management  in  the  process 


158  Organizing  a  Business 

of  organizing  the  operation  of  the  company  into  depart- 
ments, each  with  its  own  specific  duties  and  responsibili- 
ties. 

(1)  Relationship  to  Proprietors 

The  proprietors,  whether  individuals,  partners,  stock- 
holders, or  members  of  a  co-operative  society,  under  the 
present  constitution  of  our  economic  institutions,  being 
responsible  for  the  failure  of  the  enterprise  which  they 
control,  are  properly  expected  and  formally  authorized 
to  determine  the  character  of  the  work  to  be  undertaken, 
the  use  of  the  capital  invested,  and  the  general  problems 
of  manufacturing  and  selling  the  goods.  Except  in  those 
organizations  where  the  proprietor  and  the  executive  are 
one  and  the  same  person  or  group  of  persons,  it  is,  how- 
ever, manifestly  impossible  for  this  body  properly  to 
supervise  the  actual  execution  of  the  policy  which  has 
been  formulated  and  adopted. 

The  executive  is,  therefore,  created  for  this  particular 
purpose.  For  example,  the  directorate  of  a  corporation 
has  decided  to  make  an  addition  to  the  factory  at  a  cost 
of  $1,000,000.  The  executive  causes  plans  to  be  prepared, 
presents  them  for  the  approval  of  the  directorate,  and 
after  such  approval,  superintends  the  erection  of  the  ex- 
tension. Again,  the  directorate  has  decided  to  lessen  the 
output  of  the  goods  manufactured  by  10  per  cent.  The 
executive  takes  the  necessary  steps  to  close  down  a  part 
of  the  factory  or  to  work  the  whole  force  fewer  hours. 
In  still  another  case  the  directorate  determines  that  it  is 
wise  and  proper  to  increase  the  dividend  rate  from  6  to  7 
per  cent.  The  executive  makes  the  necessary  arrange- 
ments for  the  payment  of  such  dividends  by  setting  aside 
the  funds  and  sending  out  the  dividend  checks. 

The  work  of  the  executive  is,  however,  not  confined  to 


Organization  for  Operation  159 

carrying  into  operation  the  specific  directions  of  the 
proprietors.  In  many,  indeed  in  most,  cases  the  directors 
formulate  the  policy  of  the  corporation  in  general  terms 
and  under  such  circumstances  the  executive  is  expected  to 
act  upon  its  own  judgment  in  the  determination  of  ways 
and  means  by  which  the  policy  is  realized.  For  example, 
a  corporation,  through  its  directors,  has  decided  to  adopt 
the  policy  of  absorbing  its  competitors  wherever  and 
whenever  opportunity  offers.  The  executive  is  apprised 
of  this  policy  and  its  function  is  then  to  secure  control  of 
rival  companies  by  the  most  appropriate  methods.  Thus 
a  considerable  amount  of  discretion  must  always  be  en- 
trusted to  the  executive  and  the  success  of  the  enterprise 
will  depend  largely  upon  the  wisdom  the  executive  dis- 
plays in  using  its  liberty. 

The  executive  is,  of  course,  in  much  closer  touch  with 
the  actual  operation  of  the  enterprise  than  the  directors 
or  the  proprietor  and,  therefore,  in  addition  to  its  work 
above  described,  it  should  prepare  plans,  make  sugges- 
tions, and  advise  the  adoption  of  such  policies  and  prac- 
tices as  in  its  judgment  will  prove  conducive  of  the  wel- 
fare of  the  company.  When  the  corporation  is  operating 
in  many  lines  and  especially  where  the  directors  are  not 
only  actively  engaged  in  business  for  themselves,  but  in 
addition  sit  as  directors  on  many  other  boards,  this  par- 
ticular function  of  the  executive  assumes  large  propor- 
tions. Indeed  in  many  cases  all  new  plans  and  proposi- 
tions for  the  improvement  of  the  company's  position 
habitually  and  normally  come  from  the  executive  depart- 
ment. Such  plans,  after  consideration  and  adoption  by 
the  responsible  managers,  will  then  be  put  into  actual 
operation  by  the  executive  officers  as  in  other  cases. 
On  the  other  hand,  the  executive,  in  its  turn,  relies  upon 
the   ideas   and   suggestions   coming   from   the    superin 


160  Organizing  a  Business 

tendents  of  factories  and  managers  of  departments  and 
it  is  customary  in  some  of  the  better-managed  business 
enterprises  to  offer  premiums  and  rewards  of  various 
kinds  for  suggestions  looking  toward  the  improvement 
of  the  company's  operations. 

(2)  Relationship  to  Operation 

The  second  of  the  important  functions  of  the  executive 
is  to  supervise  the  organization  of  the  operations  of  the 
company  into  departments,  to  appoint  the  official  heads 
of  each,  and  to  see  that  each  department  not  only  does 
its  own  work  effectively,  but  at  the  same  time  co-operates 
with  the  other  departments  with  which  it  comes  into 
active  contact.  In  this  work  there  are  two  general  meth- 
ods of  organization.  The  first  is  based  upon  the  char- 
acter of  the  work  performed,  the  second  upon  geograph- 
ical location.  Thus,  for  example,  the  American  Smelting 
and  Refining  Company  subdivides  its  operations  into 
three  grand  departments  based  upon  economic  consid- 
erations, namely,  the  purchasing  department,  whose  duty 
it  is  to  purchase  ores,  the  operating  department,  whose 
duty  it  is  to  reduce  and  refine  ores,  and  the  sales  depart- 
ment, whose  duty  it  is  to  sell  the  finished  product.  At  the 
same  time  the  plants  are  organized  into  groups,  based 
upon  geographical  location.  For  example,  the  Colorado 
group  comprises  the  plants  located  in  Colorado  and  vicin- 
ity, with  headquarters  at  Denver.  The  southern  group 
comprises  the  plants  in  Texas,  Arizona,  New  Mexico, 
and  Mexico,  with  headquarters  in  Mexico  City. 

Of  these  two  basic  principles  of  organization,  the  geo- 
graphical has  the  advantage  of  economizing  distance,  the 
functional  or  industrial,  the  work  of  supervision.  Where 
the  operations  are  widely  scattered,  as  in  the  case  of  the 
smelting  company  just  mentioned,  the  geographical  basis 
must  be  observed  to  a  considerable  extent.    Thus  while 


Organization  for  Operation  161 

the  corporation  organizes  its  work  into  purchasing, 
refining,  and  selling  departments,  it  at  the  same  time 
makes  use  of  its  resident  managers  of  plants  to  act  as 
local  agents  of  the  purchasing  department,  thus  saving 
the  expenses  of  a  local  purchasing  agent.  Where  the 
purchasing  of  ores  becomes  of  especial  importance  a 
resident  agent  of  the  department  is  stationed. 

Owing  to  the  fact  that  most  of  the  large  corporations 
operate  plants  located  at  considerable  distance  from  each 
other,  and  at  the  same  time  maintain  purchasing  or  selling 
agencies  at  these  same  points,  it  is  usually  found  advisa- 
ble to  follow  the  plan  adopted  by  the  smelting  company 
and  thus  to  a  certain  extent  use  both  principles  of  organi- 
zation. In  such  cases  some  of  the  officers  serve  in  a  dual 
capacity,  working  under  one  department  head  part  of  the 
time  and  under  another  the  remainder.  "While  the  man- 
ager of  a  plant  is  managing  the  reduction  of  ore  in  the 
furnace,  he  is  responsible  to  the  operating  department 
and  reports  to  the  general  manager.  When,  however,  he 
is  purchasing  ore  he  is  responsible  to  the  purchasing 
department  and  reports  to  the  general  purchasing  agent. 
Such  overlapping  of  departments  is,  however,  directly 
contrary  to  the  principle  of  specialization  and  is,  there- 
fore, adopted  only  where  the  work  of  one  department  is 
not  sufficiently  important  to  occupy  the  full  time  of  an 
officer  of  the  requisite  capacity. 

Functional  Organization 

Wherever  possible,  the  management  finds  it  desirable 
to  organize  the  operating  activities  of  the  enterprise  on 
the  basis  of  the  character  of  the  work  which  is  being 
performed.  When  this  method  is  followed,  the  number 
of  departments  is  determined  by  the  extent  of  the  activi- 
ties which  the  company  undertakes.  By  referring  to 
the  section  on  fundamental  principles  it  will  be  noticed 


/  3.  The  purchasing  department 
4.  The  ore  and  coal  department 


162  Organizing  a  Business 

that  the  industrial  and  commercial  activities  are  sepa- 
rated naturally  into  several  groups,  many  or  all  of  which 
may  be  undertaken  by  a  particular  business  enterprise. 
If,  for  example,  we  take  the  most  extensive  business 
enterprise  known,  namely,  the  United  States  Steel  Cor- 
poration, we  find  that  there  is  almost  no  phase  of  business 
activity  which  it  is  not  actually  undertaking  day  by  day, 
and  on  examination  we  find  all  of  the  following  activities 
with  the  corresponding  departments  in  actual  operation : 
*»  1.  The  legal  department 
—  2.  The  accounting  department 

5.  The  manufacturing  department 

6.  The  sales  department 

7.  The  traffic  department 

All  of  these  departments  are,  it  will  be  observed,  the 
instrumentalities  through  which  the  general  executive 
conducts  the  practical  operations  of  the  company.  All 
of  them  are,  therefore,  strictly  speaking,  subordinate  to 
the  central  authority.  They  differ  among  themselves  in 
one  important  particular,  however,  namely,  some  of 
them  are  general  departments,  being  connected  with  all 
the  operations  of  the  company,  while  others  are  what 
may  be  called  "special  departments,"  having  no  neces- 
sary connection  with  any  other  branch  of  the  business. 
In  the  first  group  are  the  legal  department  and  the 
accounting  department.  In  the  second  group  are  the 
purchasing,  the  ore  and  coal,  the  manufacturing,  the 
sales,  and  the  traffic  departments. 

Detailed  discussions  of  the  organization,  function,  and 
operation  of  these  several  departments  are  given  in  the 
appropriate  volumes  of  this  series.  The  following  dia- 
gram makes  plainer  the  above  analysis  of  the  operating 
organization. 


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164  Organizing  a  Business 

TEST  QUESTIONS 

1.  What  is  the  relationship  between  proprietorship  and  oper- 
ating organization? 

2.  By  what  principles  is  the  operating  organization   deter- 
mined ? 

3.  In  what  respects  is  the  executive  alike  in  all  of  the  types  of 
operative  organizations  ? 

4.  What  are  the  advantages  respectively  of  the  single  and  the 
plural  executive? 

5.  How  is  responsibility  to  the  proprietorship  secured? 

6.  What  are  the  two  main  functions  of  an  executive? 

7.  What  is  meant  by  functional  organization? 

8.  What  are  some  of  the  main  departments  required  under  a 
functional  system  of  organization? 


CHAPTER  XI 
business  combinations  and  trusts 

Reasons  for  Combinations 

Business  enterprises,  whether  controlled  by  the  indi- 
vidual proprietor,  the  partnership,  the  corporation,  or 
the  co-operative  society,  are  entirely  independent  of  each 
other  in  their  working  operations  except  in  so  far  as 
they  voluntarily  form  alliances  of  more  or  less  perma- 
nence and  of  greater  or  less  vitality.  Indeed,  until  the 
middle  of  the  last  century  their  individual  independence 
was  so  marked  and  dominant  that  the  theory  of  political 
economy  as  well  as  of  law  was  largely  based  upon  this 
idea.  With  the  introduction  of  machinery,  the  bringing 
of  large  groups  of  capitalists  and  workingmen  into 
closer  proximity,  and  the  development  of  the  railroad  and 
the  telegraph,  industrial  enterprises  of  certain  classes 
were  brought  into  direct  competition,  and  the  struggle 
for  existence  was  thus  extended  to  the  business  field. 

As  a  result  of  the  new  conditions,  various  forms  of 
unions  have  been  originated  and  adopted,  all  having  a 
common  purpose,  namely,  to  subserve  the  interests  of 
the  parties  to  the  organizations.  The  form  of  union 
adopted  varies  with  the  character  of  the  parties  to  it, 
with  the  purposes  to  be  attained,  and  with  the  local  con- 
ditions in  the  various  countries  in  which  they  are 
operated.  But  all  of  these  organizations,  whatever  their 
form,  have  one  feature  in  common,  namely,  they  unite 
business  enterprises  into  a  higher  type  of  organic  union. 
Just  as  individuals  unite  into  partnerships,  corporations, 
or  co-operative   societies,   so  business   enterprises  join 

165 


166  Organizing  a  Business 

together  to  form  business  alliances  of  various  kinds  and 
for  various  purposes. 

The  more  important  of  these  alliances  are  the  associa- 
tion, the  combination,  the  trust,  the  holding  corporation, 
and  the  leasing  company.  In  addition  to  these,  informal 
alliances  are  sometimes  devised,  such  as  the  community 
of  interests;  and  finally  a  complete  merger  may  take 
place,  in  which  case  the  alliance  is  made  direct  and  per- 
manent and  the  formerly  independent  or  partially  inde- 
pendent business  enterprises  lose  their  identity,  being 
permanently  amalgamated  into  a  new  union  of  greater 
size  and  greater  complexity. 

The  Association 

The  association  is  a  voluntary  alliance  of  business 
enterprises  for  the  purpose  of  furthering  their  common 
interests.  Its  members  may  ordinarily  withdraw  at  any 
time,  and  usually  each  one  is  required  to  pay  a  small 
annual  fee  in  order  to  continue  in  the  organization.  The 
association  works  through  a  central  board  of  directors 
or  a  central  committee,  elected  from  the  membership. 
Its  efficiency  depends  upon  two  things:  (1)  the  activity 
of  the  central  committee;  and  (2)  the  co-operation  of 
the  individual  members.  If  the  central  committee  is 
inefficient  or  if  the  members  fail  to  co-operate,  the  asso- 
ciation is  a  failure.  If,  however,  the  committee  is  active 
and  vigilant  and  is  supported  by  substantial  contribu- 
tions resulting  in  a  full  treasury,  it  is  possible  to  accom- 
plish much  even  though  the  individual  members  of  the 
organization  devote  themselves  entirely  to  their  own 
private  interests. 

TYPES  OF  ASSOCIATION 

The  association  has  two  principal  types,  the  first  being 
composed  of  various  kinds  of  business  enterprises  within 


Combinations  and  Trusts  167 

a  given  territory,  and  the  second,  of  business  enterprises 
of  the  same  character  with  little  or  no  regard  to  geo- 
graphical location. 

The  first  type  is  illustrated  by  local  commercial  clubs 
and  chambers  of  commerce  of  various  cities,  and  the  sec- 
ond type,  by  the  trade  and  manufacturing  associations 
of  various  states  and  of  the  United  States  where  mem- 
bership is  confined  to  one  branch  of  business  activity. 
The  first  type  varies  greatly  in  size  and  efficiency,  but  all 
have  the  common  characteristic  of  uniting  business  enter- 
prises of  many  kinds  within  the  same  territory.  Some 
of  these  associations  are  informal  in  character,  while  oth- 
ers operate  under  a  charter  provided  for  associations 
working  for  general  purposes  rather  than  for  direct 
pecuniary  profit  to  the  members.  To  illustrate  the  work 
of  this  type  of  general  association,  the  following  organi- 
zations have  been  selected:  The  Chamber  of  Commerce 
of  Champaign,  Illinois,  and  the  Merchants'  Association 
of  New  York  City. 

(1)  Commercial  Clubs 

The  Champaign  Chamber  of  Commerce  was  founded 
in  1900  by  the  retail  merchants  of  the  city  for  the  pur- 
pose of  establishing  and  maintaining  a  co-operative 
credit-rating  society.  Gradually  other  interests  sought 
admission  to  its  membership  and  with  its  enlargement 
came  an  extension  of  its  activities  about  five  years  after 
its  foundation.  It  was  then  incorporated  under  the  Illi- 
nois act  for  societies  not  operating  for  pecuniary  profit, 
and  subsequently  has  still  further  enlarged  its  work 
until  its  scope  of  operation  is  now  co-extensive  with  the 
political,  social,  and  business  activity  of  the  city.  Within 
recent  years  it  has  been  instrumental  in  securing  early 
closing  during   the   summer  months   and   has   taken   a 

12 


168  Organizing  a  Business 

prominent  part  in  securing  improvements  in  the  city  gov- 
ernment, especially  in  the  fire  department,  the  parks,  the 
water  system,  and  pavements.  It  has  been  the  medium 
of  securing  for  the  community  more  favorable  conditions 
in  express  and  railway  rates ;  it  has  assisted  in  locating 
some  important  manufacturing  establishments  in  the 
city,  and  is  carrying  on  a  movement  looking  towards  the 
improvement  of  the  roads  in  the  locality. 

Thus  the  Champaign  Chamber  of  Commerce,  begin- 
ning as  an  organization  of  retail  merchants  chiefly  for 
selfish  purposes,  has  by  the  process  of  natural  evolution 
become  an  association  representing  all  the  interests  of 
the  city  and  devoted  to  the  general  welfare  rather  than 
the  special  interests  of  a  class. 

The  Merchants'  Association  of  New  York  City  is  a  sec- 
ond example  of  a  general  business  association,  represent- 
ing this  type  in  its  most  comprehensive  form.  This 
association  was  founded  in  1898  "to  foster  trade  and 
commerce  and  the  interests  of  those  having  trade,  busi- 
ness and  financial  interests  in  common  in  the  State  of 
New  York  and  elsewhere,  to  reform  abuses  relative 
thereto,  or  affecting  the  same,  to  secure  freedom  from 
unjust  or  unlawful  exactions,  to  diffuse  accurate  and 
reliable  information  concerning  matters  relating  thereto 
or  otherwise,  to  procure  uniformity  and  certainty  in  the 
customs  and  uses  of  trade  and  commerce,  to  settle  differ- 
ences and  to  procure  uniformity  of  opinion  and  action 
and  co-operation  between  its  members,  to  procure  a  more 
enlarged,  united  and  friendly  intercourse  and  action 
between  business  men,  and  to  do  such  other  and  further 
acts  and  tilings  relating  thereto  which  may  be  found  nec- 
essary or  convenient,  so  far  as  the  same  are  permitted 
by  the  laws  of  the  State  of  New  York  to  corporations 
organized  under  this  act."  x 

i  Year  Book,  Merchants'  Association  of  New  York,  1910. 


Combinations  and  Trusts 


169 


It  is  chartered  under  the  membership  corporation  law 
of  New  York  and  consequently  is  managed  by  a  board  of 
directors  and  the  usual  executive  officers.  Upon  the 
operating  side  it  works  through  committees,  some  of 
which  are  permanent  and  some  temporary.  The  com- 
mittees are  as  follows: 


Executive 

Commercial  law 

City  conditions 

City  plan 

City  transportation  and  ter- 
minals 

Currency 

Customs  service  and  revenue 
laws 

Domestic  commerce 

Pollution  of  state  waters 

Protection  of  industrial  prop- 
erty 

Telephones 


Water  supply 
Gas  and  electricity 
Express  transportation 
Foreign  and   colonial   com- 
merce 
Harbor  and  shipping 
Insurance 

International  arbitration. 
Judicial  administration. 
Library 
Postal  affairs 
Taxation  and  finance 
Terminals  and  port  charges 


The  committee  list  shows  in  a  general  way  the  varied 
activities  of  this  association.  The  organization  has  been 
especially  active  in  the  following  lines:  Special  pas- 
senger rates  for  merchants  visiting  New  York,  western 
freight  rate  cases,  Chattanooga  rate  case,  port  differen- 
tials, express  rates  in  New  York  State,  uniform  bill  of 
lading,  removal  of  steam  railway  tracks  from  the  streets 
of  the  city,  improving  waterways  and  harbors,  establish- 
ment of  a  permanent  tariff  commission,  and  city  admin- 
istration. 

While  the  Merchants'  Association  of  New  York  City  is 
founded  upon  the  territorial  idea,  it  recognizes  the  spe- 
cial interest  of  trade  groups  by  arranging  for  informal 
meetings  of  the  various  lines  of  commercial  and  indus- 


170  Organizing  a  Business 

trial  activities  in  the  city.  For  example,  during  the  year 
1909  informal  meetings  of  the  jewelry  and  allied  trades, 
woman's  apparel  trades,  and  the  white  goods  division 
of  the  dry  goods  trade,  were  held  for  the  purpose  of  dis- 
cussing topics  of  special  interest  to  these  groups.  It  is 
the  plan  to  continue  these  group  meetings  until  all  the 
important  trade  groups  in  the  city  have  been  reached. 
The  inauguration  of  this  policy  had  the  effect  of  increas- 
ing the  membership,  thus  securing  the  interest  of  many 
business  enterprises  not  attracted  by  the  general  asso- 
ciation. 

(2)  Trade  and  Manufacturing  Organizations 

The  second  type  of  organization  caters  to  the  special 
interests  of  a  particular  industrial  or  commercial  group. 
The  scope  of  its  Avork  is  more  limited  in  character,  but 
it  gains  in  efficiency  where  it  loses  in  breadth.  These 
associations  are  exceedingly  numerous  and  all  are 
formed  upon  essentially  the  same  principle  and  operated 
in  the  same  general  way.  Among  the  organizations  the 
Illinois  Manufacturers'  Association  has  been  selected 
for  purposes  of  illustration.  This  organization  was 
founded  in  1898  and  operates  -under  an  Illinois  charter 
provided  for  such  societies.  It  has  a  board  of  directors 
and  the  usual  list  of  executive  officers.  Its  membership 
is  made  up  of  manufacturers  of  all  classes  having  plants 
located  within  the  state,  and  in  addition  includes  a  few 
manufacturers  whose  plants  are  situated  outside  the 
state  but  whose  work  is  intimately  connected  with  indus- 
trial conditions  within  Illinois.  Like  other  associations, 
it  operates  chiefly  through  committees,  some  of  which 
are  permanent  and  some  of  which  are  temporary. 

During  the  year  1910  this  association  was  interested 
especially  in  two  particular  projects :   (1)  in  a  conference 


Combinations  and  Trusts  171 

of  industrial  and  commercial  organizations  for  the  pur- 
pose of  securing  the  repeal  of  the  corporation  tax  law ; 
and  (2)  in  a  conference  of  shippers  and  commercial 
organizations  for  the  purpose  of  opposing  an  advance  in 
freight  rates  both  east  and  west.  At  each  of  these  con- 
ferences representatives  of  business  enterprises  from  all 
parts  of  the  country  were  present  and  a  general  discus- 
sion of  the  propositions  was  held  in  open  meeting.  As  a 
result  of  the  first  conference,  that  on  corporation  tax  law, 
a  committee  was  sent  to  "Washington  to  present  the  views 
of  the  association  to  the  federal  Congress.  A  series 
of  resolutions  was  drawn  up,  discussed,  and  finally 
adopted,  and  a  committee  of  eleven  was  appointed  for 
the  purpose  of  presenting  the  resolutions.  While  it  is 
impossible  to  ascertain  just  what  influence  this  confer- 
ence had,  it  is  claimed  by  the  association  that  it  resulted 
in  suppressing  the  publicity  clause  of  the  Federal  Cor- 
poration Tax  Act. 

The  second  conference  was  attended  by  a  large  number 
of  representatives  of  business  enterprises  located  chiefly 
in  Illinois  and  the  Central  West.  At  this  meeting  the 
general  subject  of  the  economic  effect  of  advanced  freight 
rates  and  the  legal  aspects  of  the  question  were  dis- 
cussed, and  as  a  result  a  series  of  resolutions  was 
adopted  to  the  following  effect: 

1.  That  the  income  of  the  various  railroads  has  been 
increasing  during  the  past  ten  years; 

2.  That  during  the  first  seven  months  of  the  year  1910 
the  net  income  of  the  principal  trunk  line  railroads  had 
also  increased; 

3.  That  in  their  opinion  a  reduction  rather  than  an 
advance  was  demanded  by  present  conditions. 

Accordingly  all  the  railroads  in  Official  Classification 
Territory  were  asked  to  suspend  the  proposed  advance 


172  Organizing  a  Business 

in  commodity  rates  and  submit  the  question  to  the  Inter- 
state Commerce  Commission  for  arbitration  to  determine 
whether  any  general  advance  in  rates  was  reasonable 
and  necessary.  For  the  purpose  of  carrying  these  reso- 
lutions into  effect  a  committee  of  fifteen,  representing  the 
general  conference,  was  appointed  and  entrusted  with 
the  duty  of  presenting  the  views  of  the  conference  to  the 
Interstate  Commerce  Commission  and  the  railroads. 
In  addition  to  the  two  important  conferences  above 
described,  the  Illinois  Manufacturers'  Association, 
through  its  permanent  organization,  is  constantly  en- 
gaged in  activities  for  the  purpose  of  protecting  the 
interests  of  manufacturers  of  the  state  from  the  various 
industrial  interests  with  which  they  come  into  conflict, 
and  at  the  same  time  for  improving  the  conditions  under 
which  the  manufacturers  are  working. 

Again  in  1914,  after  the  outbreak  of  the  European 
"War,  this  association  made  strenuous  efforts  to  capture 
some  of  the  foreign  trade  that  had  been  cut  off  because 
of  the  war.  It  appointed  committees  to  investigate  the 
various  trade  questions  involved,  and  co-operated  with 
other  associations  and  commercial  bodies  working  along 
the  same  lines. 

In  common  with  the  commercial  associations,  the  Illi- 
nois Manufacturers'  Association,  it  will  be  noticed, 
works  chiefly  through  indirect  methods  of  influencing 
other  organizations  and  especially  the  state  legislature 
and  the  national  Congress.  Whenever  any  measure  is 
proposed  which,  in  the  opinion  of  the  association,  would 
be  detrimental  to  the  interests  of  manufacturers,  the 
views  of  the  organization  are  presented  through  a  com- 
mittee of  the  association  to  the  proper  committee  of  the 
legislature.  Whenever  legislation  is  proposed  in  which 
they  are  interested  they  assist  in  securing  such  legisla- 


Combinations  and  Trusts  173 

tion.  To  show  the  extent  of  the  work  which  has  been 
undertaken  by  the  association,  the  following  quotation 
from  a  pamphlet  issued  by  this  organization  is  added : 

Our  Association  stopped  the  publicity  required  by  the  Federal 
corporation  tax  law. 

We  took  the  initiative  in  securing  the  appointment  of  a  state 
commission  to  draft  an  employers'  liability  measure  to  submit 
to  the  next  Illinois  General  Assembly. 

We  secured  for  manufacturers  of  this  state  reasonable  factory 
inspection,  hazardous  machinery  legislation,  and  defeated  a  very 
unfair  measure  that  it  was  attempted  to  put  through  the  legis- 
lature. 

We  are  now  opposing  the  proposed  increase  of  from  twelve 
to  sixteen  per  cent  in  the  freight  rates  on  coal  in  Illinois  and 
Indiana,  because  an  advance  at  this  time  is  unwarranted  by 
conditions  and  cannot  be  added  to  cost  of  marketing  our  product. 

We  have  a  committee  which  is  working  out  a  plan  to  take  care 
of  the  refuse  and  discarded  material. 

We  have  created  a  bureau  whose  influence  will  be  used  to 
minimize  thefts  in  your  plant. 

We  have  a  committee  that  has  started  an  agitation  to  secure 
the  best  possible  public  highways  for  the  $7,000,000  taxes  which 
the  property  owners  of  this  state  pay  every  year  for  that  purpose. 

We  are  agitating  the  rearrangement  of  railroad  terminals  in 
Chicago  so  that  freight  can  be  handled  more  expeditiously,  which 
means  economy. 

The  Combination 

The  combination,  like  the  association,  is  made  up  of 
business  enterprises  which  are  otherwise  independent. 
In  the  case  of  the  combination,  however,  these  enter- 
prises are  generally  engaged  in  the  same  line  of  indus- 
trial activity.  It  differs  from  the  association  in  that  it 
imposes  certain  direct  obligations  upon  each  of  the  mem- 
bers.   Consequently,  in  order  to  be  successful,  a  combi- 


174  Organizing  a  Business 

nation  must  embrace  a  large  majority  of  all  business 
enterprises  of  the  same  kind  within  a  given  market. 

A  combination  is  held  together  by  an  agreement  or 
contract  specifying  the  terms  under  which  the  members 
unite  into  the  union.  Each  enterprise  thus  loses  a  part 
of  its  independence,  but  retains  its  liberty  in  all  points 
not  covered  by  the  terms  of  the  agreement.  When  a 
member  of  the  combination  breaks  the  rules  of  the 
organization,  it  nullifies  to  that  extent  the  work  of  the 
organization.  Such  an  organization  may  be  either  legal 
or  illegal.  Wherever  they  are  legal  the  articles  under 
which  they  operate  constitute  a  contract  and  may  be 
enforced  as  other  contracts.  Wherever  such  organiza- 
tions are  illegal,  their  permanence  and  efficiency  depend 
entirely  upon  the  willingness  of  each  of  the  members  to 
live  up  to  the  terms  of  the  combination. 

In  the  United  States  such  organizations  from  the  begin- 
ning have  been  held  to  be  either  invalid  or  criminal.  In 
the  first  case  the  state  and  national  authorities  will  not 
assist  an  organization  in  its  efforts  to  secure  obedience  to 
the  general  agreement.  In  the  second  case  the  state  and 
national  administrations  will,  under  proper  conditions, 
take  steps  to  punish  the  members  of  such  organization 
for  becoming  members  of  a  criminal  organization. 

PURPOSES  OF   COMBINATIONS 

Combinations  are  formed  for  the  purpose  of  directly 
increasing  the  business  prosperity  of  the  various  mem- 
bers. This  may  be  accomplished  either  by  lessening 
competition,  thus  enabling  the  industry  in  which  the  com- 
bination is  formed  to  secure  better  prices,  or  by  improv- 
ing the  operating  conditions,  thus  lowering  the  cost  of 
production.  Since  a  combination  is  at  best  a  temporary 
affair   and    the    members    retain   their   own    individual 


Combinations  and  Trusts  175 

rights  except  in  so  far  as  the  agreement  or  contract  ex- 
tends, it  is  usually  impossible  to  secure  economies  in  man- 
ufacturing and  ordinarily  impracticable  in  either  purchas- 
ing the  materials  or  selling  the  goods.  Consequently  a 
combination  is  generally  forced  to  direct  its  energies  to- 
ward lessening  competition  and  securing  increased  prices. 

CLASSES   OF   COMBINATIONS 

Combinations  are  ordinarily  classified  in  accordance 
with  the  means  which  they  take  to  secure  the  ends  for 
which  they  are  formed,  and  may  therefore  be  divided  into 
the  following  groups : 

1.  Price  combinations 

2.  Production  combinations 

3.  Geographical  combinations 

4.  Combinations  for  sharing  the  business 

5.  Combinations  for  sharing  the  profits 

The  first  three  classes  of  combinations  are  sometimes 
called  " limiting  combinations,"  because  they  accomplish 
their  purpose  by  limiting  the  activity  of  the  members  in 
regard  to  prices,  output,  or  territory.  The  last  two 
classes,  on  the  other  hand,  accomplish  their  purpose  by 
sharing  in  predetermined  proportions  the  business  or  the 
profits  and  are  therefore  called  "sharing  combinations," 
or,  on  account  of  their  leading  characteristics,  "pools." 

In  a  price  combination  the  agreement  provides  for  a 
certain  minimum  price,  below  which  no  member  of  the 
combination  can  sell  a  specified  line  of  goods.  Conse- 
quently this  form  of  organization  is  adapted  to  those 
lines  of  industry  in  which  goods  are  of  a  staple  quality 
and  standard  designs.  In  any  other  line  it  has  the  effect 
of  increasing  competition  in  the  quality  of  the  goods 
while  limiting  it  in  regard  to  the  price.    Price  combina- 


176  Organizing  a  Business 

tions,  therefore,  are  of  importance  in  only  a  compara- 
tively few  lines  of  manufacturing. 

A  limitation  of  output  has  the  same  effect  as  a  price 
combination  in  an  indirect  way — by  limiting  the  produc- 
tion the  price  can  be  maintained.  For  example,  if  the 
output  of  factories  producing  a  certain  line  of  goods  be 
limited  to  two-thirds  of  their  capacity,  the  supply  of 
goods  on  the  market  will  be  decreased  and  the  price  will 
automatically  rise  to  a  higher  level.  This  form  of  com- 
bination is  therefore  useful  wherever  it  is  more  con- 
venient to  limit  the  output  than  it  is  to  limit  the  price. 

Wherever  it  is  difficult  to  limit  either  price  or  output, 
and  the  factories  are  located  in  distant  territories,  the 
third  form  of  combination  is  sometimes  used.  The  ter- 
ritory is  divided  into  districts  and  each  manufacturer  is 
assigned  a  particular  territory  within  which  he  may  sup- 
ply the  trade  without  competition  from  any  other  pro- 
ducer. Customers  from  without  the  territory  of  any 
particular  member  of  the  combination  are  either  referred 
to  the  manufacturer  within  the  district  to  which  the  con- 
sumer belongs  or  the  order  is  nominally  filled  by  the 
manufacturer  receiving  it,  but  the  actual  production  of 
the  goods  and  the  profit  on  the  same  are  assigned  to  the 
proper  member  of  the  combination. 

In  certain  industries  neither  of  the  above  forms 
of  combination  is  practicable.  Hence  manufacturers 
arrange  in  advance  to  share  whatever  orders  may  come 
upon  the  market  upon  the  percentage  basis.  For  exam- 
ple, Co.  A  will  receive  15  per  cent,  Co.  B  10  per  cent, 
Co.  C  5  per  cent,  and  so  on,  until  the  total  production  is 
provided  for.  Whenever  orders  are  received  they  are 
either  divided  directly  and  assigned  to  the  companies  in 
the  proper  proportions  or  the  orders  are  assigned  to  par- 


Combinations  and  Trusts  111 

ticular  manufacturers  in  such  a  way  that  their  proper 
quota  is  maintained. 

In  the  profit-sharing  combination  each  member  is  en- 
tirely independent  of  the  others  in  manufacturing  the 
goods  and  usually  in  their  sale.  The  total  profits  of  the 
business  of  an  entire  group  is,  through  a  central  account- 
ing office,  ascertained  and  distributed  among  the  various 
members  in  accordance  with  a  scale  agreed  upon  at  the 
establishment  of  the  organization.  The  members  of  the 
combination  are  interested  not  in  their  own  individual 
profits,  but  in  the  combined  profits  of  the  entire  organi- 
zation. Hence  it  is  for  the  interest  of  each  party  to 
maintain  the  prices  and  limit  the  output  so  far  as  neces- 
sary in  order  to  make  the  profits  of  the  entire  organiza- 
tion as  great  as  possible.  The  member  who  cuts  prices 
for  the  sake  of  increasing  his  own  output,  increases  his 
own  profits,  but  he  does  this  at  the  expense  of  the  profits 
of  the  other  members.  He  finds  that  his  share  of  the 
profits,  as  determined  by  the  central  office,  is  increased 
by  maintaining  a  price  policy  that  is  favorable  to  the 
business  interests  of  the  industry  rather  than  of  his  own 
particular  plant. 

In  the  United  States  the  combinations  have  two 
marked  disadvantages:  (1)  they  are  unable  to  effect 
economies  in  production;  and  (2)  they  are  non-enforce- 
able at  common  law,  and  since  about  1880  they  have  gen- 
erally been  made  illegal  under  statute  law.  While  in  cer- 
tain instances  they  have  been  remarkably  successful  for 
a  limited  period,  generally  they  have  been  short-lived 
and  at  their  termination  conditions  in  the  industry  have 
been  so  disadvantageous  as  to  overcome  partially  if  not 
wholly  all  the  advantages  which  had  been  secured  during 
the  short  period  of  the  combination.  Consequently  the 
business  interests  have  sought  other  means  of  securing 


178  Organizing  a  Business 

the  end  and  have  generally  adopted  in  recent  years  some 
one  of  the  following  forms  of  organization. 

Trusts 

general,  characteristics 

In  the  United  States  the  trust  was  the  direct  successor 
of  the  combination.  It  was  devised  by  the  Standard  Oil 
Company  in  1879  and  is  generally  accredited  to  Mr. 
Dodd,  the  general  solicitor  of  that  corporation.  In 
theory  the  trust  is  so  simple  that  it  is  difficult  to  under- 
stand now  why  it  was  not  devised  earlier.  In  the  first 
place,  all  business  enterprises  becoming  parties  to  a 
trust  are  incorporated  if  they  are  not  alread}^  corpora- 
tions. A  board  of  trustees  is  then  arranged,  which  is- 
sues trust  certificates  equal  in  amount  to  the  sum  of  all 
the  shares  in  the  various  corporations.  Trust  certifi- 
cates are  then  exchanged  for  the  shares  of  stock  or  so 
many  thereof  as  become  parties  to  the  trust.  It  is  neces- 
sary that  over  one-half  of  the  voting  shares  in  each  one 
of  the  corporations  be  exchanged  for  trust  certificates 
in  order  that  the  trust  may  work  successfully.  The 
board  of  trustees  holds  a  majority  of  the  voting  stock  of 
each  of  the  corporations,  elects  the  several  boards  of  di- 
rectors, and  through  the  said  boards  controls  the  busi- 
ness policy  of  each  one  of  the  subsidiary  corporations. 
The  holders  of  the  trust  certificates  elect  the  trustees, 
make  the  by-laws,  and  receive  the  dividends  declared 
upon  trust  certificates  in  exactly  the  same  way  as  the 
shareholders  in  the  ordinary  corporation. 

ADVANTAGES  OF  A  TRUST  FORM 

The  trust  thus  possesses  all  the  advantages  of  the  com- 
bination,  and  in  addition  certain   others  of  great  im- 


Combinations  and  Trusts  179 

portance  which  the  combination  never  was  able  to  obtain. 
Like  the  combination,  the  trust  could  regulate  and  main- 
tain prices,  limit  the  output,  or  divide  the  territory  when- 
ever such  a  policy  was  thought  advisable.  It  could  dis- 
tribute the  work  among  the  several  corporations,  and  by 
virtue  of  its  organization  the  profits  were  shared  in  pro- 
portion to  the  trust  certificates  held  by  the  former  share- 
holders in  the  several  corporations.  Furthermore, 
whenever  practicable,  all  of  the  shares  were  thus  ex- 
changed and  the  trust  became  practically  a  permanent 
organization;  it  was  therefore  possible  to  secure  all  the 
economies  of  centralized  management  and  concentrated 
production. 

CENTRALIZED    ADMINISTRATION" 

The  trustees  controlling  the  election  of  the  directors  in 
the  subsidiary  corporations  could  consolidate  the  admin- 
istration by  appointing  a  general  sales  agent,  a  general 
manager  for  the  plants,  a  general  auditor,  a  general 
treasurer,  and  other  general  officers.  Consequently 
standard  methods  in  all  departments  could  be  introduced 
and  a  comparative  method  of  securing  efficiency  installed 
and  operated.  The  production  could  be  concentrated  in 
the  plants  most  economically  located  and  operated,  and 
plants  operating  with  less  efficiency  could  be  dismantled 
or  sold. 

SUCCESSFUL  BUT  ILLEGAL 

On  account  of  these  advantages,  the  success  of  the 
Standard  Oil  Trust  and  of  its  immediate  predecessors 
was  so  pronounced  that  a  considerable  number  of  trust 
organizations  was  formed  and  this  became  the  character- 
istic method  of  uniting  business  enterprises  during  the 
decade  from  1880  to  1890. 


180  Organizing  a  Business 

T\xdt  this  form  was  not  more  widely  adopted  was  due 
to  two  causes:  (1)  the  difficulty  of  adjusting  the  inter- 
ests of  the  several  business  enterprises  united;  and  (2) 
the  decision  of  the  supreme  courts  in  New  York  and 
Ohio  to  the  effect  that  the  trust  form  of  organization  was 
illegal.  It  was  therefore  abandoned  and  the  consolida- 
tions operating  under  this  particular  form  of  organiza- 
tion were  converted  into  a  new  type  of  organization, 
which  will  now  be  described. 

The  Holding  Corporation 
characteristics 

The  holding  corporation  is  in  many  respects  compar- 
able to  the  trust.  It  consists  in  the  incorporation  of  a 
company  under  the  laws  of  some  one  of  the  several 
states,  with  a  charter  permitting  the  enterprise  so  or- 
ganized to  hold  shares  of  stock  in  other  corporations  as 
well  as  physical  assets.  The  holding  corporation  dates 
from  as  early  as  1832  when  the  Baltimore  &  Ohio  Rail- 
road Company  was  authorized  by  the  state  of  Maryland 
to  subscribe  to  shares  of  stock  in  the  Washington  Branch 
Road.  This  method  was  used  on  a  large  scale  by  the 
Pennsylvania  Railroad  Company  as  early  as  1853,  and 
it  was  adopted  by  that  company  in  1870  as  an  appropriate 
method  for  controlling  the  Pennsylvania  lines  west  of 
Pittsburg. 

From  this  time  on  it  became  a  fairly  common  instru- 
ment by  which  business  enterprises,  especially  in  the 
railroad  field,  were  consolidated  into  one  organic  union. 
Until  1888,  however,  it  was  generally  considered  neces- 
sary to  obtain  special  authorization  for  the  purpose  of 
holding  shares  of  stock  in  other  corporations.  In  that 
year  the  state  of  New  Jersey  provided  by  an  amendment 
to  the  corporation  act  that  companies  chartered  under 


Combinations  and  Trusts  181 

her  laws  might  in  certain  cases  hold  stock  in  other 
corporations.  In  1889  the  law  was  further  amended  by 
providing  that  corporations,  where  their  charter  so  pro- 
vided, might  hold  stock  in  corporations  in  which  they 
were  directly  interested,  and  in  1893  the  act  was  made 
general,  permitting  any  corporation  to  hold  stock  in  any 
other  corporation. 

The  holding  corporation  then  became  the  direct  suc- 
cessor of  the  trust.  It  was  not,  however,  adopted  in  a 
general  way  until  about  ten  years  after  it  was  first  gen- 
erally authorized,  but  during  the  period  from  1898  to 
1901  a  large  number  of  holding  corporations  were  or- 
ganized and  since  that  time  it  has  become  the  character- 
istic form  of  organizing  business  enterprises  into  a  per- 
manent form  of  union. 

STBUCTTTKE 

In  its  structure  the  holding  corporation  is  identical 
with  that  of  the  ordinary  corporation.  It  is  composed  of 
a  group  of  shareholders  who  own  stock,  elect  the  direct- 
ors, receive  the  dividends,  and  possess  the  same  rights 
and  are  under  the  same  obligations  as  the  shareholders 
of  a  regular  corporation.  It  differs  in  one  important  re- 
spect. Its  property  account  is  made  up  of  shares  of 
stock  in  one  or  more  corporations  rather  than  the  real 
estate,  buildings,  and  other  assets  of  the  ordinary  cor- 
poration. 

The  holding  corporation  receives  its  income  from  the 
dividends  declared  by  the  corporations  whose  shares  it 
holds,  and  such  income  is  then  declared  in  dividends  to 
its  own  shareholders. 

CONTROL    OF    SUBSIDIARIES 

Like  the  trust,  the  directors  of  the  holding  corporation 
elect  the  directors  of  the  subordinate  corporations  and 


182  Organizing  a  Business 

thus  are  able  to  determine  the  business  policy  of  each  one 
of  its  subsidiary  companies.  Furthermore  the  directors 
of  the  holding  corporation,  through  the  directors  of  the 
subsidiary  corporations,  have  the  power,  and  generally 
make  use  of  it,  to  direct  the  operations  of  the  subordinate 
companies  in  accordance  with  the  general  plan  of  ad- 
ministration, provide  for  a  general  purchasing  depart- 
ment, a  general  sales  department,  a  general  accounting 
department,  and  for  the  organization  under  a  central- 
ized office  of  all  the  manufacturing.  The  holding  cor- 
poration thus  indirectly  controls  not  only  the  business 
policy,  but  the  actual  operating  organization  of  each  one 
of  the  companies  in  which  it  holds  a  majority  of  the 
stock. 

MONOPOLISTIC  HOLDING  COKPOEATIONS 

It  will  be  noticed  that  the  holding  corporation  may,  by 
extending  the  sphere  of  its  influence,  gain  control  of  an 
entire  industry  and  thus  become  a  practical  monopoly. 
On  this  account  certain  of  the  holding  corporations  have 
been  attacked  under  the  Sherman  Anti-Trust  Law,  which 
declares  every  contract  or  combination  in  the  form  of  a 
trust  or  otherwise,  or  conspiracy  in  restraint  of  com- 
merce among  the  states,  illegal.  Under  the  authority  of 
the  Sherman  Act  the  Northern  Securities  Company,  the 
Standard  Oil  Company,  the  Dupont  Powder  Company, 
the  Union  Pacific  Railway  Company,  and  other  holding 
companies  have  been  dissolved  by  order  of  the  Supreme 
Court  of  the  United  States. 

While  monopolistic  holding  corporations  may,  through 
the  activity  of  the  federal  government,  be  dissolved,  it 
is  apparent  that  unless  they  obtain  a  monopoly  holding 
corporations  are  legal  instruments  for  centralizing  both 
the  proprietorship  interests  and  the  operating  organiza- 


Combinations  and  Trusts  183 

tions  of  those  business  enterprises  which  desire  to  asso- 
ciate in  this  way. 

The  Leasing  Company 

In  this  form  of  organization  one  of  the  companies, 
generally  the  one  in  the  more  dominant  position,  leases 
those  companies  with  which  it  seems  desirable  to  form 
an  organic  union.  The  lease  may  be  either  for  a  tempo- 
rary period  or  for  so  long  a  period  that  it  practically 
amounts  to  a  perpetual  relation. 

The  leases  are  of  two  kinds:  (1)  the  direct  money 
rental  and  (2)  the  contingent  lease.  In  the  first  type  all 
of  the  net  revenue  arising  from  the  operation  of  the  sec- 
ond company  accrues  to  the  leasing  company.  In  the 
second  type  the  profits  are  shared  between  the  two  com- 
panies in  accordance  with  the  terms  of  the  contingent 
lease.  In  either  case  the  leasing  company  controls  both 
the  business  policy  and  the  operating  organization  of  the 
company  which  it  has  leased. 

The  lease  system  has  been  used  chiefly  among  rail- 
roads. In  many  cases,  owing  to  the  difficulty  of  fixing 
the  terms  of  the  lease,  the  central  company  has  been 
obliged  to  purchase  a  considerable  portion  of  either 
shares  or  bonds  in  order  to  make  the  terms  of  the  lease 
sufficiently  favorable  to  itself.  It  is  obvious,  of  course, 
that  whenever  a  railroad  becomes  involved  in  financial 
troubles,  it  is  particularly  easy  for  some  stronger  rail- 
road operating  in  the  same  territory  either  to  purchase 
a  partial  interest  in  it  or  to  advance  money  to  it  and  thus 
be  in  a  position  to  dictate  the  terms  of  the  lease.  In  the 
case  of  manufacturing  and  commercial  establishments 
the  lease  system  has  never  become  of  great  importance. 


184  Organizing  a  Business 

Community  of  Interests 

The  original  Standard  Oil  Trust  was  formed  in  1879. 
A  group  of  men  interested  in  the  petroleum  industry  had 
gradually  purchased  a  partial  or  controlling  interest  in  a 
considerable  number  of  refineries.  There  was  thus  no 
organic  union  between  these  business  enterprises,  but  on 
account  of  common  ownership  the  virtual  consolidation 
of  the  various  companies  was  brought  about. 

Such  an  informal  organization  is  known  as  a  commun- 
ity of  interests.  This  method  of  uniting  business  enter- 
prises has  been  adopted  in  a  considerable  number  of 
cases  where  no  direct  form  was  found  feasible.  In  1902, 
when  the  Northern  Securities  Company  was  dissolved  by 
order  of  the  Supreme  Court,  the  continuation  of  the  con- 
trol exercised  over  the  general  administration  of  the 
Northern  Pacific  and  the  Great  Northern  Company  was 
perpetuated  by  this  principle.  The  stock  held  by  the 
shareholders  of  the  Northern  Securities  Company  was 
called  in  and  destroyed  and  in  return  for  these  certifi- 
cates a  proportionate  interest  in  both  of  the  companies 
was  transferred  to  the  Northern  Securities  Company 
shareholders.  Thus  the  two  companies  had  a  common 
body  of  shareholders,  or  a  community  of  interests. 

The  community  of  interests  enables  a  common  group 
of  shareholders  in  several  companies  to  dominate  and 
control  the  business  policy  of  the  company,  but  ordinarily 
does  not  permit  of  the  inauguration  of  a  centralized  ad- 
ministration. It  is  used  only  when  no  other  form  of  union 
is  practicable. 

The  Merger 

Under  certain  circumstances  the  union  of  related  com- 
panies may  become  so  complete  and  permanent  that  it  is 
thought  desirable  to  abolish  the  corporate  organization 


Combinations  and  Trusts  185 

of  the  subordinate  companies,  transfer  their  assets  to 
the  central  company,  and  thus  bring  about  a  complete 
merger  of  all  of  the  companies  in  the  organization  into 
one  permanent  union,  generally  in  the  corporate  form. 
In  such  cases  the  organization,  both  from  the  internal  and 
the  operating  standpoint,  reverts  to  the  original  type  of 
the  ordinary  corporation. 

TEST  QUESTIONS 

1.  What  conditions  have  brought  about  the  combination  and 
trust  movement? 

2.  "What  are  the  chief  classes  of  combinations  ? 

3.  What  is  the  nature  of  an  association  ? 

4.  What  two  types  of  associations  may  be  recognized? 

5.  What  are  some  of  the  services  of  local  chambers  of  com- 
merce ? 

6.  What  are  the  chief  functions  of  trade  and  manufacturing 
organizations?    How  do  they  serve  modern  business? 

7.  What  are  the  five  chief  types  of  combinations? 

8.  According  to  what  characteristics  may  they  be  grouped 
into  two  main  divisions?  What  would  be  included  under  each 
division  ? 

9.  Explain  by  what  methods  the  combinations  effect  their 
purpose. 

10.  What  is  meant  by  a  trust?     How  does  the  popular  con- 
ception of  a  trust  differ  from  the  legal  conception? 

11.  Should  regulated  trusts  be  legalized? 

12.  What  are  the  characteristics  of  a  holding  corporation? 

13.  How  does  the  holding  corporation  differ  from  a  trust  ? 

14.  What  has  been  the  attitude  of  American  governments  to- 
ward the  holding  company? 

15.  In  what  line  of  business  is  the  leasing  company  used  to  a 
considerable  extent? 

16.  What  is  meant  by  a  "community  of  interests"? 

17.  When  does  a  merger  exist? 

13 


CHAPTER  XII 

comparative  efficiency  of  the  various  types  of 
business  organization 

Importance  of  the  Type 

In  the  preceding  chapters  the  several  types  of  business 
organization  have  been  described  somewhat  in  detail  for 
the  purpose  of  showing  the  individual  characteristics 
of  each.  Special  attention  has  been  called  to  the  ad- 
vantages and  disadvantages  of  the  several  forms  in 
order  that  the  attention  of  the  reader  might  be  directed 
toward  the  availability  of  each  of  the  types  for  the  pur- 
pose of  organizing  and  managing  individual  business  en- 
terprises. 

While  organization  is  not  an  end  in  itself,  it  cannot 
be  denied  that  the  type  of  organization  selected  has  an 
important  relation  to  the  efficiency  of  the  management. 
The  organization  may  be  compared  to  the  automobile, 
to  take  a  familiar  example;  the  management,  to  the 
chauffeur.  A  skilled  chauffeur  can  operate  a  poorly  con- 
structed automobile  fairly  well,  while  a  person  unskilled 
in  the  act  of  running  a  motor  car  cannot  operate  even  the 
highest  type  of  car  at  all.  The  skilled  chauffeur  and  the 
well-constructed  car  represent,  it  will  be  readily  ad- 
mitted, the  ideal  in  motor-car  operation. 

The  same  general  principle,  while  not  so  obvious, 
applies  with  equal  force  in  the  domain  of  business  organ- 
ization. Like  the  automobile,  however,  the  business 
organization  needs  to  be  well  constructed  and,  like  the 
automobile  again,  it  needs  to  be  adapted  to  the  task  which 

186 


Comparative  Efficiency  187 

it  is  to  be  called  upon  to  perform.  Certain  types  of  cars 
are  adapted  to  certain  purposes.  The  racing  car,  while 
efficient  upon  the  track,  could  not  be  compared  with  the 
touring  car  for  pleasure  riding  over  the  boulevards.  The 
holding  corporation  is  admirably  adapted  to  certain 
purposes,  but  with  all  its  excellences,  it  would  hardly  be 
selected  for  the  purpose  of  controlling  and  managing  a 
blacksmith  shop  located  in  an  out-of-the-way  village. 

Tests  of  Efficient  Organization 
What  then  are  the  tests  of  all  effective  and  appropriate 
business  organizations?  The  object  of  a  business  or- 
ganization is  to  facilitate  the  operation  of  a  particular 
business  enterprise  so  that  the  business  enterprise  may 
yield  to  its  owners  the  highest  possible  permanent  rate 
of  profits  on  the  capital  invested.  An  organization 
should,  therefore,  in  order  to  meet  this  requirement,  be 
inexpensive  to  install  and  efficient  in  operation,  so  that,  as 
a  result  of  its  operations,  a  reasonable  amount  of  goods 
may  be  produced  and  marketed.  Based  upon  the  above 
general  principles,  the  following  specific  tests  may  be 
found  of  service  in  determining  the  suitableness  of  a 
given  form  of  organization  to  any  given  business  enter- 
prise which  it  may  be  proposed  to  establish  and  operate : 

1.  Facility  of  formation 

2.  Legality  of  organization 

3.  Adaptability  to  raising  the  proper 

amount  of  capital 

4.  The  risk  to  individual  investors 

5.  Permanence    of   the    organization 

6.  Ease  and  efficiency  of  operation 

FACILITY   OF   FORMATION 

The  individual  proprietor  exists.    All  other  types  of 
business  organization  are  created  by  the  deliberate  and 


188  Organizing  a  Business 

conscious  effort  of  persons  or  groups  of  persons  who 
have  united  for  purposes  of  associated  profit.  A  small 
partnership  is  not  usually  difficult  to  form;  a  large  one 
is.  As  a  result  there  are  many  small  partnerships  and 
few  large  ones.  With  the  corporation  the  case  is  differ- 
ent. The  small  corporation  is  easy  to  form  and  the  same 
is  true  of  the  large  one  in  so  far  as  the  intrinsic  conditions 
are  concerned.  This  results  from  the  fact  that  none  of 
the  shareholders,  as  such,  are  directly  connected  with  the 
management.  Theoretically  the  shareholder  in  a  small 
corporation  has  no  more  connection  with  its  business  af- 
fairs than  the  shareholder  in  a  large  one.  The  difficulties 
connected  with  the  formation  of  a  corporation  increase 
with  the  number  of  shareholders  associated  together,  but 
not  in  proportion  to  the  actual  increase,  while  with  the 
partnership  the  difficulties  increase  with  an  increase  of 
numbers  in  some  sort  of  geometrical  proportion. 

On  the  basis  of  the  first  test,  the  partnership  is  limited 
to  undertakings  in  which  relatively  few  persons  are 
financially  interested.  This  advantage  in  favor  of  the 
corporation  is  somewhat  lessened  by  the  fees  usually  im- 
posed upon  the  original  issue  of  capital  stock  and  the 
annual  franchise  tax  imposed  in  some  states.  Corpora- 
tion taxes,  however,  increase  with  the  amount  of  the  capi- 
tal stock  issued  rather  than  with  the  number  of  stock- 
holders interested.  The  promoter  should  in  all  cases 
first  investigate  the  costs  and  difficulties  attendant  upon 
the  formation  of  the  available  types  of  business  organi- 
zation and  select  that  form  which,  other  things  being 
equal,  may  be  formed  with  the  greatest  ease  and  facility. 

LEGALITY   OF   ORGANIZATION 

The  type  most  easily  formed  may  not,  however,  be 
available,  owing  to  legal  restrictions.    Those  instrumen- 


Comparative  Efficiency  189 

tal  in  determining  the  form  should,  early  in  their  pro- 
ceedings, take  into  consideration  the  law  of  the  land. 
Partnerships  are  generally  in  favor  in  all  states  and 
jurisdictions.  In  certain  cases,  however,  the  law  disap- 
proves of  the  partnership  and  approves  of  the  corpora- 
tion. The  most  conspicuous  example  of  this  conscious 
favoring  of  the  corporation  form  exists  in  the  banking 
business.  Formerly  private  individual  bankers,  partner- 
ship banking  firms,  and  corporate  banks  were  equally 
favored  in  practically  all  jurisdictions.  In  1862  the 
United  States  adopted  the  policy  of  establishing  national 
banks  and  at  the  same  time  decreed  that  all  such  banks 
should  be  corporations.  Since  that  date  many  of  the 
states  have  adopted  provisions  requiring  that  all  those 
carrying  on  the  business  of  banking  within  their  respec- 
tive limits  should  incorporate  under  the  state  law. 
Building  and  loan  associations  likewise  are  good  ex- 
amples of  business  enterprises  that  quite  generally  are 
required  by  law  to  operate  as  corporations. 

The  law  in  certain  cases  not  only  prescribes  the  form 
of  organization  that  must  be  used,  but  also  forbids  the 
formation  of  certain  kinds  of  business  enterprises  at  all. 
As  a  general  proposition  it  is  contrary  to  law  in  the 
United  States  to  form  either  a  combination  or  a  trust. 
Holding  corporations,  consolidations  by  lease,  and  com- 
plete mergers  in  the  corporate  form  may  or  may  not  be 
legal,  dependent  upon  whether  the  object  is  to  form  a 
monopoly  or  a  combination  in  restraint  of  trade  on  the 
one  hand,  or  a  legitimate  combination  on  the  other. 

(1)  Monopolies 

A  monopoly  exists  whenever  a  single  business  enter- 
prise, whether  in  the  form  of  an  individual  proprietor- 
ship, partnership,  corporation,  trust,  or  other  form  of 


190  Organizing  a  Business 

business  organization,  controls  the  sale  of  any  special 
commodity  within  any  given  market.  Having  control  of 
the  sale  of  the  article,  the  monopoly  is  able  to  fix  the 
price  arbitrarily.  Under  such  conditions,  the  price  is,  of 
course,  fixed  at  that  point  which,  under  the  given  con- 
ditions of  demand,  jdelds  the  maximum  net  profits  to  the 
owners  of  the  business  enterprise  in  question. 

Monopolies  are  classified  in  many  different  ways,  but 
the  simplest  classification  is  that  based  upon  the  source 
of  the  monopoly  power.  According  to  this  classification, 
monopolies  are  either  legal,  natural,  or  industrial.  Each 
of  these  needs  a  brief  description,  as  the  name  is  not  in 
itself  explanatory. 

(a)  Legal  Monopolies. — A  legal  monopoly  exists  only 
by  a  direct  or  indirect  grant  from  some  governmental 
agency  to  some  particular  business  enterprise.  The  best 
examples  of  legal  monopolies  are  to  be  found  in  the 
"grants"  of  the  English  sovereigns,  during  the  later 
middle  ages,  to  individuals  or  groups  of  individuals,  gen- 
erally in  exchange  for  a  cash  payment,  aid  in  raising  and 
equipping  armies,  or  other  assistance.  Such  grants 
were  called  "patents  of  monopoly." 

At  the  present  time  legal  monopolies  are  not  common 
except  in  the  form  of  patents  and  copyrights.  Such 
monopolies,  however,  owing  to  the  activity  of  inventors 
and  writers,  are  usually  of  minor  importance.  The  com- 
petition between  rival  patented  articles  and  rival  books 
is  sufficiently  active,  except  in  isolated  instances,  to  pre- 
vent any  arbitrary  control  over  price. 

A  third  example  of  legal  monopolies  is  found  in  the 
municipal  franchises  so  common  in  recent  years.  A  cor- 
poration is  granted  by  a  municipality  the  exclusive  right 
to  supply  electricity,  gas,  water,  or  local  transportation 
to  its  citizens.    Such  companies  then  possess  a  legal  mo- 


Comparative  Efficiency  191 

nopoly.  It  is  not  usual,  however,  to  grant  such  monopo- 
lies without  retaining  at  least  the  power  to  fix  the  rates 
which  the  holders  of  the  franchise  may  charge  and  the 
conditions  of  service  under  which  they  must  operate.  In 
such  cases  the  owners  are  said  to  operate  under  a  regu- 
lated monopoly. 

(b)  Natural  Monopoly. — A  natural  monopoly  is  more 
difficult  to  define.  Generally  speaking  a  natural  mo- 
nopoly is  based  upon  natural  conditions.  A  careful  analy- 
sis of  the  term  "natural  monopoly"  and  of  the  examples 
of  natural  monopolies  usually  cited  will  show  that 
natural  monopolies  are  in  reality  due  to  the  advantages 
flowing  from  the  centralized  management  of  certain  en- 
terprises operating  in  natural  resources  usually  concen- 
trated in  a  small  geographical  area.  The  anthracite  coal 
industry  is  ordinarily  cited  as  a  typical  example  of  a 
natural  monopoly.  Formerly  the  anthracite  coal  indus- 
try was  an  example  of  an  intensely  competitive  industry. 
Soon  the  disadvantages  of  competition  and  the  advan- 
tages of  unified  ownership  and  operation  became  so  ob- 
vious that  the  separate  holdings  in  the  anthracite  field 
were  gradually  consolidated,  until  at  the  present  time  the 
competitive  element  has  been  largely  eliminated.  The 
price  of  anthracite  coal  is,  however,  determined  not  by 
arbitrary  action,  but  by  competition.  Formerly  it  was 
competition  between  the  various  owners  of  anthracite 
mines.  At  the  present  time  it  is  the  competition  of  an- 
thracite with  bituminous  coal  that  finally  determines  the 
price. 

Public  utilities,  such  as  water,  gas,  electricity,  railway, 
telephone,  and  telegraph  businesses  tend  to  become  nat- 
ural monopolies  wherever  they  are  not  made  legal  monop- 
olies. The  fundamental  cause  is  identical  with  that  of  the 
operations  in  the  anthracite  field.  The  operation  of  com- 


192  Organising  a  Business 

petitive  waterworks,  gas  plants,  telephone  systems,  elec- 
tric traction  routes,  and  other  public  utilities  within  the 
same  territory  is  both  wasteful  and  inconvenient.  Each 
community  naturally  wishes  to  secure  the  conveniences 
of  modern  living  in  the  cheapest  and  most  economical 
way.  The  owners  of  rival  plants  find  that  their  expenses 
are  increased  by  competition  and  the  revenues  are  at  the 
same  time  lessened.  Such  enterprises,  therefore,  natur- 
ally consolidate  and  hence  are  called  natural  monopolies. 

(c)  Industrial  Monopolies. — An  industrial  monopoly 
is  the  name  given  to  those  combinations,  trusts,  and  hold- 
ing corporations  where  the  process  of  consolidation  has 
gone  so  far  as  to  embrace  within  the  ownership  and  con- 
trol of  one  organization  an  entire  or  almost  an  entire 
industry.  Such  monopolies  are  not  based  upon  law  and 
hence  are  not  legal  monopolies.  It  has  been  contended 
by  some  that  they  are  fundamentally  based  upon  econ- 
omies and  conveniences  and  are,  therefore,  natural 
monopolies  in  fact,  if  not  in  name.  This  contention  has 
been  ably  supported  by  argument,  but  it  may  be  noted 
here  that  such  contentions  cannot  be  proved  in  this  way, 
but  must  rather  submit  themselves  to  the  slower  but 
surer  arbitrament  of  time.  A  half  century  of  experience 
with  industrial  monopolies  will  enable  us  to  determine 
whether  they  are  a  new  variety  of  natural  monopoly  or 
artificial  creatures  constructed  and  operated  to  secure 
to  their  owners  an  inequitable  portion  of  the  national 
dividend. 

If  such  monopolies  prove  to  be  founded  upon  national 
laws,  they  will  then  be  classed  with  the  public  utilities  as 
natural  monopolies  and  governments  generally  will  re- 
vise their  laws  relative  to  monopoly,  permit  such  or- 
ganizations to  be  formed,  but  subject  them  to  strict  gov- 


Comparative  Efficiency  193 

ernment  supervision.    They  will  then  become,  like  most 
public  utilities,  regulated  monopolies. 

(2)  Restraint  of  Trade 

The  term  "restraint  of  trade"  has  a  long  legal  history 
reaching  far  back  into  the  Middle  Ages.  Historically 
speaking,  contracts  in  restraint  of  trade,  under  the  Eng- 
lish common  law,  have  been  held  invalid  in  some  cases 
and  criminal  in  other  cases.  In  the  first  case  the  state 
would  permit  such  contracts  but  would  not  assist  in  their 
enforcement;  in  the  latter  case  the  state  has  absolutely 
prohibited  the  existence  of  such  contracts.  In  accordance 
with  the  general  tendency  to  enact  into  state  law  the  es- 
tablished principles  of  the  common  law,  the  United 
States  Congress  in  1890  passed  the  Sherman  Anti-Trust 
Act,  which,  among  other  things,  provides  that  "every 
contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy  in  restraint  of  trade  or  commerce  among 
the  several  states  or  with  foreign  nations  is  hereby  de- 
clared to  be  illegal."  This  statute  has  been  vigorously 
enforced,  especially  since  1900,  with  the  result  that  at 
the  present  time  the  term  "restraint  of  trade"  has  been 
legally  adjudicated  in  a  considerable  number  of  cases  by 
the  highest  court  in  the  land. 

Until  1911  the  Supreme  Court  inclined  toward  con- 
struing the  term  strictly.  Consequently  every  act  inter- 
fering or  tending  to  interfere  with  the  utmost  freedom 
of  competition  between  business  enterprises  was  held 
to  be  forbidden  by  the  law.  In  the  famous  Standard  Oil 
decision  handed  down  in  1911,  the  Supreme  Court,  in  an 
opinion  written  by  Chief  Justice  White,  took  the  ground 
that  the  term  "restraint  of  trade"  ought  to  be  given  its 
historical  meaning  as  shown  by  a  review  of  the  impor- 
tant  decisions   arising  under   the   common   law.     This 


194  Organizing  a  Business 

changing  in  the  attitude  of  the  court  had  the  result  of 
giving  the  term  under  discussion  a  meaning  more  in 
accordance  with  the  demands  of  modern  business 
conditions.  The  later  interpretation  of  the  phrase 
"restraint  of  trade"  held  that  only  such  acts  as  unreason- 
ably interfered  with  the  freedom  of  competition  were  in- 
cluded within  its  prohibitions.  In  other  words  it  was 
construed,  quoting  the  words  of  the  court,  in  the  "light 
of  reason"  rather  than  in  the  spirit  of  slavish  devotion 
to  the  letter  of  the  law. 

As  a  result  of  this  change  in  interpretation,  there  has 
come  a  corresponding  change  in  the  attitude  of  the  fed- 
eral administration  and  the  authorities  having  charge 
of  the  enforcement  of  the  anti-trust  acts  in  several  of  the 
states.  "Whereas  restraint  of  trade  was  formerly  looked 
upon  as  a  distinct  and  separate  category  in  the  business 
world,  it  is  now  considered  by  the  administration  and  the 
courts  in  its  inevitable  and  necessary  relationship  to  the 
creation  and  perpetuation  of  industrial  monopolies.  Acts 
which  tend  to  establish  or  maintain  industrial  monopo- 
lies are  ipso  facto  acts  in  restraint  of  trade.  Organiza- 
tions created  for  the  purpose  of  establishing  and  operat- 
ing industrial  monopolies  in  interstate  trade  are  illegal 
under  the  Sherman  Act  and  are  therefore  prohibited  by 
law.  To  form  such  organizations  men  must  combine  to- 
gether, consolidating  their  property  rights  into  a  unified 
business  enterprise  of  some  form.  "Any  combination  to 
do  an  unlawful  act  or  a  lawful  act  by  unlawful  means ' '  is 
a  conspiracy,  and  where  such  acts  are  done  in  connection 
with  trade  and  commerce,  they  are  conspiracies  in 
restraint  of  trade.  A  conspiracy  in  restraint  of  trade, 
therefore,  is  an  act  or  acts  through  which  a  number  of 
individuals,  otherwise  independent  and  unrelated  in  their 
business  interests,  unite  to  accomplish  some  unlawful  act 


Comparative  Efficiency  195 

or  a  lawful  act  in  an  unlawful  manner.  Under  this  clause 
of  the  Sherman  Anti-Trust  Act  individuals  may  be  held 
responsible  for  uniting  together  for  the  purpose  of  re- 
straining interstate  and  foreign  trade  or  commerce. 

In  order  to  define  more  clearly  the  scope  and  meaning 
of  the  Sherman  Act,  Congress  enacted,  in  1914,  the  so- 
called  Clayton  Act,  entitled  "An  act  to  supplement  exist- 
ing laws  against  unlawful  restraint  and  monopolies," 
etc.  In  connection  therewith  the  Federal  Trade  Com- 
mission, a  body  composed  of  five  persons  to  be  appointed 
by  the  President,  was  created  and  authorized  to  enforce 
the  provisions  of  the  several  anti-trust  acts.  The  commis- 
sion was  given  power  to  make  investigations,  conduct 
hearings,  and  issue  orders  to  persons  and  organizations 
found  guilty  of  restraining  trade  by  unfair  methods  of 
competition  or  other  unlawful  acts  or  practices,  to  cease 
and  desist  from  the  same.  In  case  of  failure  to  comply 
with  the  orders  of  the  commission,  the  Circuit  Court  of 
Appeals  on  information  by  the  commission  is  authorized 
to  review  the  proceedings  and  to  enforce,  modify,  or  set 
aside  the  orders  as  in  its  judgment  shall  seem  desirable. 

The  creation  of  the  Federal  Trade  Commission  will,  it 
is  expected,  do  much  to  clarify  the  business  situation,  re- 
move many  of  the  uncertainties  that  have  in  the  past 
hampered  the  activities  of  business  men,  discourage  the 
formation  of  industrial  monopolies,  and  strengthen  the 
hands  of  those  business  men,  always  in  the  majority, 
who  are  conducting  their  business  enterprises  in  a  legal, 
efficient,  and  equitable  manner. 

ADAPTABILITY  TO  EAISING  CAPITAL 

There  is  no  particular  in  which  business  enterprises 
differ  more  widely  than  in  the  amount  of  capital  neces- 
sary for  their  efficient  operation.    For  some  a  few  nun- 


196  Organizing  a  Business 

dred  dollars  is  amply  sufficient.  For  others  the  upper 
limit  reaches  into  the  hundred  millions.  In  most  indus- 
tries the  size  of  the  most  efficient  plant  and,  as  a  neces- 
sary consequence,  the  amount  of  capital  required  are 
slowly  but  steadily  increasing.  In  those  industries  re- 
quiring large-scale  production,  the  organization  must  be 
selected  with  a  view  to  its  adaptability  for  collecting  and 
combining  a  large  amount  of  capital.  Such  organiza- 
tions must  appeal  to  a  wide  territory  and  to  a  large  num- 
ber of  investors. 

Occasionally  the  individual  proprietor  is  able  to  com- 
mand ample  if  not  unlimited  funds.  For  example,  Henry 
H.  Rogers  built  and  equipped  the  Virginian  Railway 
partly  with  his  own  funds  and  almost  wholly  on  his  own 
personal  credit.  The  same  may  be  said  with  equal  truth 
of  Henry  M.  Flagler  and  the  Florida  East  Coast  Railway. 
Again  some  partnerships  are  in  a  position  to  finance 
large,  if  not  the  largest,  business  enterprises  of  the 
period  in  which  they  are  in  active  operation.  The  Fug- 
gers  of  the  later  Middle  Ages  and  J.  P.  Morgan  &  Com- 
pany of  the  present  day  are  familiar  examples. 

The  instances  cited  are,  however,  the  exceptions  rather 
than  the  rule.  Generally  if  an  enterprise  demands  a 
large  investment,  many  investors  must  be  associated  to- 
gether to  furnish  the  necessary  capital.  The  result  of 
this  condition,  a  condition  so  universal  and  far-reaching 
that  it  might  well  be  termed  a  law,  is  to  force  all  large- 
scale  enterprises  into  the  corporation  form.  As  a  gen- 
eral rule,  small  enterprises  may  choose  among  the  three 
important  kinds  of  business  organization — the  individ- 
ual proprietorship,  partnership,  and  corporation.  Me- 
dium-sized enterprises  must  confine  their  choice  to  the 
partnership  and  the  corporation.    The  very  largest  have 


Comparative  Efficiency  197 

no  choice  at  all;  they  must  inevitably  accept  the  corpo- 
rate form. 

The  mobilization  of  investors  in  business  is  as  impor- 
tant as  the  mobilization  of  troops  in  war.  While  the  in- 
vestment bankers  are  the  active  agencies  in  promoting 
such  mobilization  of  investors,  they,  of  course,  are  lim- 
ited by  opportunities  for  investment  which  they  are  per- 
mitted by  custom,  conditions,  and  law  to  offer  to  their 
constituency.  Owing  partly  to  intrinsic  qualities  and 
partly  to  the  safeguards  furnished  by  the  states  to  corpo- 
rate securities,  investments  at  wholesale  in  every  other 
form  are  unable  to  compete  in  the  investment  market 
with  the  standard  issues  of  well-known  corporations. 

THE    RISK    TO    INDIVIDUAL    INVESTORS 

As  stated  in  an  earlier  chapter,  the  business  enter- 
prisers are  expected  to  assume  the  financial  responsibility 
for  promoting  and  operating  business  enterprises,  take 
the  profits  in  case  of  successful  ventures,  and  shoulder 
the  losses  occasioned  by  unsuccessful  ones.  While  this 
general  theory  has  never  been  perfectly  realized  in  actual 
practice,  it  is  nevertheless  true  that  in  the  effort  to  create 
a  risk-assuming  class,  separate  and  distinct  from  the 
other  three  great  classes  participating  in  organized  pro- 
duction, the  percentage  of  unsuccessful  ventures  has 
been  lessened  and  efficiency  in  production  greatly  stimu- 
lated. While  the  present  system  has  undoubtedly  tended 
to  minimize  the  hazards  that  naturally  and  persistently 
attend  the  investment  of  capital  in  business  undertak- 
ings, it  is  still  true  that  business  is  always  risky  and  that 
those  who  undertake  the  responsibility  of  investing  capi- 
tal funds  must  be  prepared  to  see  a  small  percentage  of 
the  invested  capital  regularly  and  persistently  lost  in  un- 
successful business  ventures. 


198  Organizing  a  Business 

Modern  business  organization  has  not  only  recognized 
this  fact,  but  has  been  partially  successful  in  securing 
three  important  results,  each  tending  to  minimize  the 
economic  suffering  that  would  normally  result  from  the 
hazards  naturally  attending  the  investment  of  capital. 
These  are  (1)  the  development  of  a  class  of  business 
enterprisers  who,  by  the  ability  to  foresee  future  tenden- 
cies, have  been  able  to  lessen  the  actual  losses  that  would 
otherwise  have  occurred;  (2)  the  segregation  of  the  risk- 
assuming  investors  into  two  distinct  subdivisions,  one 
of  which  assumes  comparatively  little  risk,  while  the 
other  assumes  the  major  portion;  and  (3)  the  introduc- 
tion of  the  principle  of  limitation  of  liability  in  the  form 
of  the  stockholding  class. 


le> 


(1)  A  Risk-taking  Class 

The  development  of  a  class  of  far-sighted  business 
managers  is  in  itself  an  achievement  of  the  greatest  sig- 
nificance and  is  one  of  the  most  important,  if  not  the  most 
important,  of  the  influences  determining  the  commercial 
supremacy  among  the  nations.  Such  a  class  once  created 
and  established  is  likely  to  be  maintained  as  long  as  the 
government  under  which  it  operates  furnishes  favorable 
conditions  for  its  activities,  provided  that  the  race  itself 
continues  strong  and  virile.  This  results  from  the  fact 
that  the  evolutionary  forces  which  produced  the  man- 
agerial class  under  such  conditions  are  continually  oper- 
ating and  that  in  addition  each  generation  of  business 
enterprisers  hands  down  its  accumulated  experiences  and 
knowledge  of  business  laws  to  the  next  in  line.  The 
managerial  class,  in  directing  the  investment  of  new  cap- 
ital and  the  activity  of  each  year's  harvest  of  new  work- 
ers in  the  industrial  world,  as  well  as  in  its  management 
of  existing  business  enterprises,  exercises,  it  must  be  ad- 


Comparative  Efficiency  199 

mitted,  tremendous  power.  As  a  result  of  the  efficacy  of 
the  evolutionary  forces  already  noticed,  it  can  continue 
to  exercise  such  power  only  so  long  as  it  protects  those 
interests  committed  to  its  charge  from  the  risks  and 
hazards  that  would,  with  less  far-sighted  vision,  prove  a 
ravenous  destroyer  of  the  capital  and  labor  force  of  the 
country. 

(2)  Classification  of  Risk-takers 

The  business  enterprisers  as  a  risk-taking  class  have 
in  the  progress  of  time  been  divided  into  ,two  subdivi- 
sions, each  having  its  own  function  to  perform.  The  first 
of  these  two  subdivisions  is  composed  of  secured  note- 
holders, the  first  mortgage-holders,  and  the  owners  of 
gilt-edged  bonds.  The  second  is  composed  of  individual 
proprietors  and  partnerships  who  have  borrowed  on  a 
mortgage  a  portion  of  their  capital,  and  stockholders  in 
the  ordinary  corporation.  Mortgage-holders,  note-hold- 
ers, and  bondholders  take  comparatively  little  risk  and 
on  that  account  receive  a  small  but  regular  return  on 
their  investment.  Individual  proprietors,  partners,  and 
stockholders  assume  a  large  portion  of  tjie  risks  of  indus- 
try and  consequently  receive  a  large  but  unduly  fluctuat- 
ing income. 

(3)  The  Principle  of  Limited  Liability 

The  introduction  and  general  adoption  of  the  principle 
of  limited  liability  has  had  the  effect  of  separating  the  sec- 
ond subdivision  of  the  risk-taking  classes,  viz.,  the  indi- 
vidual proprietors,  the  partners,  and  the  stockholders, 
into  two  subordinate  classes,  the  one  of  which  includes 
the  individual  proprietors  and  the  partners  and  the 
other,  the  stockholders.  Those  in  the  first  of  these  two 
subordinate  classes  are  required  by  law  to  make  good 

14 


200  Organizing  a  Business 

any  losses  occasioned  by  the  operation  of  their  business 
ventures  out  of  capital  funds  which  they  may  have 
invested  in  other  enterprises.  For  example,  investor  A 
may  own  a  grocery  store  worth  $10,000,  on  which  there  is 
a  first  mortgage  of  $6,000.  He  may  also  own  100  shares 
of  stock  in  a  corporation  operating  a  coal  mine  in  a 
village  near  by,  for  which  he  has  paid  $10,000  in  cash. 
Let  us  assume  (1)  that  the  grocery  store  fails,  a  receiver 
is  appointed,  and  on  investigation  it  is  found  that  inves- 
tor A  owes  for  goods  on  account  $3,000  and  other  bills 
amounting  to  $1,000.  The  stock,  fixtures,  etc.,  are  sold 
at  auction  and  realize  $8,000.  The  condition  of  his  gro- 
cery business  then  is  found  to  be  as  follows : 

Statement  of  Affairs 

Assets  Liabilities 

Cash    $  8,000       Secured  condition   $  6,000 

Deficit    2,000       Unsecured  condition   4,000 


$10,000  $10,000 


The  receiver  finds  that  investor  A  is  the  owner  of 
certain  shares  in  the  neighboring  coal  mine  and,  under 
the  law,  sells  so  much  of  the  coal  mine  stock  as  is  neces- 
sary to  pay  the  deficit  arising  from  the  operation  and 
sale  of  the  grocery  store.  The  creditors  are  therefore 
paid  in  full.  It  may  be  noticed  in  passing  that  if  investor 
A  had  had  no  investment  except  that  in  the  grocery 
store,  the  unsecured  creditors  would  have  received  only 
50  per  cent  on  their  claims. 

(2)  Suppose  the  coal  mining  corporation  fails.  A 
receiver  is  appointed  and  it  is  found  that  the  corporation 
owes  $25,000  and  that  the  assets  are  worth  at  forced  sale 
only  $10,000.    There  is  $50,000  of  full  paid  capital  stock. 


Comparative  Efficiency  201 

Before  the  enactment  of  the  limited  liability  laws,  inves- 
tor A  would  have  been  responsible  for  his  share  of  the 
net  indebtedness,  or  $3,000.  His  grocery  store  would 
have  been  sold  and  the  proceeds  after  paying  the  first 
mortgage  would  have  been  used  to  satisfy  claims  arising 
out  of  the  failure  of  the  coal  corporation.  If  we  may 
assume  that  the  grocery  store  at  forced  sale  would  have 
realized  only  $9,000,  investor  A  would  have  lost  not  only 
the  coal  mine,  but  his  equity  in  the  grocery  store  as  well. 
Under  the  laws  relating  to  the  limitation  of  liability, 
investor  A's  investment  in  the  grocery  store  would  have 
been  free  from  liability. 

When  an  individual  proprietor  or  a  partner  in  a  firm 
invests  capital  in  any  particular  business  enterprise,  all 
of  his  capital,  without  regard  to  location  or  use,  is  legally 
liable  for  the  losses  incurred  on  account  of  the  particular 
business  in  question.  When  a  stockholder  invests  in  a 
particular  corporation,  this  investment  "  stands  upon  its 
own  bottom,"  to  use  an  expressive  phrase,  and  any  losses 
arising  on  account  of  this  particular  investment  cannot 
be  assessed  upon  the  stockholder's  other  investments. 
The  limitation  of  liability,  in  other  words,  has  the  effect 
of  making  each  individual  business  responsible  for  its 
own  obligations,  and  prevents  such  obligations  from 
being  satisfied  out  of  funds  invested  in  other  businesses. 

This  limited  liability  feature  may  well  be  characterized 
as  one  of  the  props  of  big  business.  Business  is  full  of 
risks.  It  is  natural  that  risk-takers  should  be  grouped 
in  accordance  with  the  responsibilities  involved  in  the 
investment.  The  effect  of  the  various  customs  and  laws 
relating  to  the  risks  assumed  by  individual  investors, 
partners  in  firms,  mortgage-holders,  bondholders,  and 
stockholders  is  shown  by  the  diagram  on  the  next  page. 

14 


202 


Organizing  a  Business 


Factors 
in  pro- 
duction 


Risk-takers    . 


Those  who  take 
much  risk 


Those  who  take 
little  risk 


L 


Individual 

proprietors 
Partners 
Stockholders 


{ 


Liability 
unlimited 

Liability 
limited 


Note-holders 

Mortgage-holders 

Bondholders 

Loans  secured  by  deposits 


Those  who 
do  not  pro- 
pose to  take 
risks 


Landholders  who  take  a  fixed  money  rent 
Wage  earners  of  all  classes 
Capitalists,  absolutely  secure 


PERMANENCE  OF  THE  ORGANIZATION 

That  the  organization  should  continue  automatically  as 
long  as  the  business  which  it  is  formed  to  operate  exists 
is  axiomatic  in  business  affairs  and  needs  no  argument 
to  substantiate  its  validity.  Business  enterprises  may 
be  short-lived  affairs  or  may  be  practically  permanent. 
Those  which  are  expected  to  live  only  a  short  time  may 
well  choose,  other  things  being  equal,  a  short-lived 
organization;  on- the  other  hand,  those  whieh  are  likely 
to  be  permanent  ought  to  choose  a  form  of  organization 
that  without  unreasonable  effort  or  expense  may  be  con- 
tinued without  interruption  forever.  Wherever  this  gen- 
eral principle  is  observed,  individual  proprietorships 
and  partnership  will  be  used  only  for  relatively  short- 
lived organizations.  Since  corporations  may  be  easily 
terminated  and  are  under  the  laws  of  most  states  easily 
continued  by  the  renewal  of  their  charters,  wherever 
perpetual  charters  are  not  permitted  the  corporate 
organization  is  adapted  to  both  types  of  enterprises. 
For  enterprises  that  are  expected  to  continue  perma- 
nently, the  corporation  has  no  competitors. 


Comparative  Efficiency  203 

EASE  AND  EFFICIENCY  OF  OPERATION 

Organization  is,  as  ha3  been  repeatedly  observed,  not 
an  end  in  itself.  Its  purpose  is  to  facilitate  the  operation 
of  the  business  enterprise  with  which  it  is  connected. 
That  organization  is  best,  therefore,  which  offers  least 
resistance  to  the  motive  forces  responsible  for  its  action. 
In  some  kinds  of  business,  the  individual  proprietorship 
works  most  efficiently  and  with  the  least  friction.  In 
such  cases,  despite  its  temporary  existence  and  unlim- 
ited liability,  it  should  be  chosen,  provided,  of  course, 
that  the  individual  proprietor  is  able  to  furnish  the 
required  capital.  Generally  speaking,  however,  those 
enterprises  that  require  large  capital,  require  at  the  same 
time  the  combined  judgment  and  ability  of  a  considerable 
body  of  men  for  efficient  management.  This  necessitates 
the  co-operation  of  the  managerial  group.  In  order  to 
interest  the  managers  of  an  enterprise  in  the  success  of 
their  concern,  it  has  been  found  desirable  to  give  each  of 
the  active  managers  a  share  in  the  contingent  profits, 
so  that  good  management  will  be  rewarded  and  bad  man- 
agement punished  automatically  and  effectively.  The 
stockholding  method  seems  to  be  the  most  effective  way 
to  do  this  and  hence  most  large  enterprises,  irrespective 
of  other  factors,  find  it  wise  to  adopt  the  corporate  form. 

Interplay  of  Principles  of  Organization 
In  closing  this  discussion,  one  further  consideration 
should  always  be  borne  in  mind.  The  several  factors 
above  enumerated  may  operate  together  or  they  may  be 
mutually  opposed  in  pairs  or  in  any  other  possible  com- 
bination. Those  engaged  in  the  construction  of  business 
organizations  should  in  all  cases  observe  the  interplay 
of  these  factors  and  finally  choose  that  form  giving  the 
greatest  surplus  of  forces  operating  in  the  line  of  prog- 


204  Organizing  a  Business 

ress.  The  situation  bears  a  marked  similarity  to  the 
operation  of  forces  in  the  physical  world.  In  the  latter 
case,  the  direction  and  the  intensity  of  each  of  the  vari- 
ous forces  can  ordinarily  be  accurately  measured  and  by 
the  principle  of  the  parallelogram  of  forces  a  solution  of 
an  otherwise  impossible  problem  is  easily  found. 

While  the  business  organizer  is  at  the  present  time 
unable  to  measure  accurately  the  forces  operating 
in  business  management  and  is  thus  prevented  from 
employing  the  mathematical  method  of  solution,  it  is 
undoubtedly  true  that  progress  is  being  made  in  esti- 
mating the  relative  strength  of  opposing  forces  in  the 
business  world  and  that  the  more  accurate  such  esti- 
mates, the  greater  the  chances  of  achieving  business  suc- 
cess. It  is  only  by  a  careful  study  of  the  different  types 
of  business  organization,  in  theory  as  well  as  in  practice, 
that  an  approximation  even  of  the  relative  advantages 
and  disadvantages  of  each  can  be  reached.  It  is  even 
more  important  that  the  combined  advantages  and  dis- 
advantages relative  to  particular  types  of  business  enter- 
prises should  be  analyzed  and  estimated,  in  order  that 
the  management  may  not  be  hampered  by  an  organiza- 
tion that  consumes  an  unnecessarily  large  portion  of  its 
strength  and  energy  by  friction  generated  by  opposing 
forces  wholly  within  itself.  That  organization  is  best 
which  offers  the  least  resistance  to  the  operation  of  the 
motive  forces  employed  in  its  active  management. 

TEST  QUESTIONS 

1.  How  can  you  illustrate  the  importance  of  the  correct  type 
of  organization  by  analogy  with  the  automobile? 

2.  What  are  the  main  tests  that  you  would  apply  in  deter- 
mining the  efficiency  of  an  organization  to  a  given  situation  1 


Comparative  Efficiency  205 

3.  On  the  point  of  facility  of  organization  what  advantages 
has  the  corporation  over  the  partnership? 

4.  In  what  types  of  business  enterprises  is  the  corporation 
form  especially  favored  by  law? 

5.  What  is  the   distinction  between  legal,  natural,  and  in- 
dustrial monopolies?    What  are  some  examples  of  each  type? 

6.  What  does  the  Sherman  Anti-Trust  Act  provide  regard- 
ing restraint  of  trade? 

7.  What  was  the  earlier  interpretation  of  that  section  by  the 
Supreme  Court  of  the  United  States? 

8.  What  change  in  policy  was  made  in  the  famous  Standard 
Oil  decision  in  1911  ? 

9.  How  has  the  Sherman  Anti-Trust  Act  been  modified  by 
the  Clayton  Act? 

10.  What  are  the  powers  and  duties  of  the  Federal  Trade 
Commission  ? 

11.  Why  is  a  partnership  not  so  well  adapted  to  raising  large 
amounts  of  capital  as  a  corporation? 

12.  Why  is  the  principle  of  limited  liability  so  important  in 
modern  industrial  organization? 

13.  What  are  the  functions  of  the  "risk-taking  class"? 

14.  What  are  the  two  chief  divisions  of  the  risk-taking  class? 
How  are  these  subdivided  ? 

15.  In  what  sources  of  business  organization  is  permanency 
of  organization  an  especially  important  point  to  consider  in  choos- 
ing a  type  of  organization  ? 

16.  In  what  ways  do  the  different  factors  that  enter  into  the 
comparative  efficiency  of  types  influence  each  other  and  thereby 
modify  the  situation  ? 


LEADING  FORMS  USED  IN  CORPORATE  MANAGEMENT 

FORM  1 

Articles  of  Co-partnership 

Agreement  of  co-partnership,  entered  into  the day 

of   ,  19..,  by  and  between    ,  of  the  city  of 

,  state  of ,  and ,  of  the  city  of , 

state  of  

First  :     The  said  parties  mutually  agree  to  become  partners 
under  the  firm  name  of ,  in  the  business  of 


for  a  period  of years  from  date,  their  place  of  business 

to  be  located  in 

Second  :     To  that  end  and  purpose has  con- 
tributed    

and   has  contributed   


to  be  used  and  employed  in  common  between  them  for  the  sup- 
port and  management  of  the  said  business  to  their  mutual  benefit 
and  advantage. 

Third:  Said  parties  agree  with  each  other  that  each  shall 
devote  his  whole  time,  attention,  talents,  and  business  capacity 
to  the  business  of  the  firm. 

Fourth:  Neither  of  the  partners  shall  become  endorser  or 
security  in  any  manner  for  any  other  person  unless  the  consent 
thereto  of  his  co-partner  shall  have  been  first  obtained  in 
writing. 

Fifth  :  There  shall  be  kept  at  all  times  during  the  continuance 
of  their  co-partnership  perfect,  just,  and  true  books  of  account 
which  shall  be  accessible  to  both  partners  at  all  times. 

207 


208  Organizing  a  Business 

Sixth  :    The  books  shall  be  balanced  on  the  first  day  of 

in  each  year,  and  the  profits  and  losses  shall  be  shared  equally 
between  said  partners. 

Seventh  :   Each  of  the  parties  may  draw  from  the  cash  of  the 

firm  the  sum  of dollars  a  month,  for  his  own  use,  the 

same  to  be  charged  on  account,  and  neither  of  them  shall  take 
any  further  sum  for  his  separate  use  without  the  consent  of  the 
other  in  writing;  any  further  sum  so  taken  shall  draw  interest 

at  the  rate  of per  cent,  and  shall  be  payable,  together 

with  the  interest  due,  within days  after  notice  in  writ- 
ing given  by  the  other  party. 

Eighth  :  When  the  firm  shall  be  dissolved  all  debts  shall  be 
paid;  a  true,  just,  and  final  account  shall  be  made  and  the  bal- 
ance shall  be  divided  equally  between  the  partners. 

Witnessed  our  hands  and  seals  this day  of , 

19... 

(Signatures)      


•  ••••••••••• 


(Signature  of  witness) 


FORM  2 
Notice  of  Dissolution  of  Partnership 

Notice  is  hereby  given  that  the  partnership  lately  existing  be- 
tween   and ,  of under 

the  firm  name  of ,  was  dissolved  on  the  

day  of ,  by  mutual  consent  (or  expired  on  the 

day  of ) . 

is  authorized  to  settle  all  debts  due  to  and  by 

said  firm. 

(Signature  of  Partners)     • 

(Date) 


Forms  209 

FORM  3 

Notice  op  a  Partner's  Withdrawal 

Notice  is  hereby  given  that ,  on  the 

day  of ,  withdrew  from  the  partnership  existing  between 

and ,  under  the  firm  name  of 

All  debts  due  to  said  partnership  and  those  due  by 

them  have  been  assumed,  by  the  remaining  partners,  who  will 
continue  the  business  under  the  firm  name  of 


(Signature  of  the  Partners) 
(Date) 


FORM  4 

General.  Contract  to  Form  a  Corporation  t 

This  agreement  made  this  first  day  of  November,  A.  D.,  1909, 
by  and  between  the  undersigned,  John  Brown,  William  Burbank, 
Edward  Cunningham,  and  Raymond  Williams,  all  of  the  city  of 
Chicago  and  state  of  Illinois. 

Witnesseth,  That  in  consideration  of  the  mutual  undertakings 
and  agreements  of  the  parties  hereto,  as  hereinafter  set  forth,  and 
in  further  consideration  of  the  sum  of  one  dollar  by  each  of  the 
said  parties  to  the  other  in  hand  paid  (at  the  time  of  the  execu- 
tion hereof),  the  receipt  of  which  is  hereby  severally  acknowl- 
edged, the  said  parties  to  this  contract  hereby  agree  by  and 
among  themselves  and  with  each  other  as  follows,  to  wit: 

First,  that  a  corporation  shall  be  formed  by  us  under  the  laws 
of  Illinois  substantially  as  follows: 

(a)  The  name  thereof  to  be  the  Perfect  Automobile  Company. 

(b)  The  capital  stock  of  said  corporation  to  be  One  Hundred 
Thousand  ($100,000.00)  Dollars,  divided  into  one  thousand 
(1,000)  shares  of  One  Hundred  ($100.00)  Dollars  each,  said 
stock  to  be  all  Common  Stock  of  uniform  character  and  usual 
form. 

i  From  Frank 's  Science  of  Organisation  and  Business  Development. 


210  Organizing  a  Business 

(c)  The  purpose  of  said  corporation  to  be  substantially  for  the 
manufacture  and  sale  of  automobiles  and  their  parts. 

(d)  Said  corporation  shall  have  a  Board  of  Directors  consist- 
ing of  five  in  number,  who  shall  all  be  stockholders  of  record  at 
the  time  of  their  election. 

(e)  The  officers  of  said  corporation  shall  be  a  President,  Vice- 
President,  Secretary,  Treasurer,  and  General  Manager. 

(f )  The  location  of  the  principal  office  to  be  at  Chicago. 

(g)  The  duration  of  said  corporation  to  be  99  years. 
Second,  we  hereby  agree  with  each  other,  and  the  one  with  the 

other,  that  we  will  take  the  number  of  shares  of  the  capital  stock 
of  said  corporation  set  opposite  our  respective  names  hereunto 
subscribed,  and  will  pay  to  the  commissioners  duly  appointed  by 
the  Secretary  of  State  of  Illinois  in  that  behalf,  fifty  (50%)  per 
cent  of  the  par  value  of  the  said  shares  so  subscribed  by  us  re- 
spectively at  the  time  of  holding  the  first  meeting  of  the  said  sub- 
scribers to  elect  a  Board  of  Directors  for  said  corporation ;  and 
we  further  agree  to  pay  the  balance  of  our  said  subscriptions 
whenever  called  upon  so  to  do  by  the  Board  of  Directors  of  said 
corporation,  after  the  same  shall  be  formed. 

Third,  we  further  nominate,  constitute,  and  appoint 

as  our  agent  (or  attorney) ,  and  the  agent  (or  attorney)  of  the  said 
corporation  so  to  be  formed,  to  create  or  cause  to  be  created  the 
said  corporation  in  accordance  with  the  laws  of  Illinois  and  this 
agreement,  and  to  do  and  perform  all  things  necessary  to  bring 
said  corporation  into  legal  existence;  and  we  further  authorize 
and  empower  our  said  agent  (or  attorney)  to- draw  on  the  funds 
in  the  hands  of  the  legally  constituted  officers  or  agents  of  said 
corporation,  for  the  necessary  expenses  attending  said  incorpora- 
tion, and  we  further  agree  that  any  and  all  contracts  which  our 
said  agent  (or  attorney)  may  make  in  such  matter  shall  be  bind- 
ing upon  said  corporation  and  also  upon  us  jointly  and  severally. 

In  witness  whereof,  we,  the  undersigned,  hereby  severally  bind 
ourselves,  our  heirs,  executors,  and  administrators. 


Forms 


211 


Names 


Address 


Shares 


Amount 


FORM  5 
Promoter's  Contract  2 

Whereas,  The  undersigned  subscribers  contemplate  the  organ- 
ization of  a  corporation  under  the  laws  of  the  State  (or  territory) 

of ,  to  be  known  by  the  name  of , 

or  by  such  other  name  as  the  subscribing  stockholders  therein 

may  adopt,  having  an  authorized  capital  stock  of  $ , 

divided  into shares  of  $ each,  for  the 

purpose  of  (state  object  of  corporation  briefly). 

It  is  hereby  agreed  by  and  between  said  subscribers  and  (pro- 
moter's name)  : 

(1)  That  each  of  said  subscribers  will  take  the  amount  of  stock 
in  said  corporation  set  opposite  his  name  and  pay  for  the  same 
according  to  the  terms  of  a  subscription  contract  tins  day  executed 
by  them. 

(2)  That  said  (promoter's  name)  has  heretofore  done  work 
and  performed  services  of  great  value  in  preparing  for  the  or- 
ganization of  said  corporation  and  securing  subscriptions  for  its 
capital  stock,  and  is  hereafter  to  perform  additional  services  in 
perfecting  its  organization  and  securing  bona  fide  subscriptions 
for  the  capital  stock  of  said  corporation  aggregating  ( aside  from 

the  stock  taken  by  the  subscribers  hereto)  the  sum  of  $ , 

or  such  part  thereof  as  the  subscribing  stockholders  may  deem 
necessary  to  dispose  of. 

(3)  Said    (promoter's  name)   shall  have   days  in 

which  to  secure  subscriptions  for  the  aforesaid  $ of 

capital  stock  of  said  company,  and  if  he  has  failed  to  do  so  at 

2  From  Modern  Business  Corporations,  by  Wm,  Allen  Wood  and  L.  B. 
Ewbank. 


212  Organizing  a  Business 

the  end  of  that  time  the  subscribers,  at  their  option,  may  extend 
his  authority  or  may  recall  it,  and  may,  if  they  so  elect,  subscribe 

for  the  remaining  portion  of  said  $ of  capital  stock  which 

then  remains  unsubscribed  for  or  induce  others  to  take  it  or 
abandon  the  formation  of  said  corporation. 

(4)  Upon  the  incorporation  of  said  proposed  company  there 
shall  be  issued  to  said  (promoter's  name),  or  to  any  person  desig- 
nated by  him,  by  indorsement  on  this  agreement,  in  payment  for 
his  services  in  effecting  such  incorporation  and  securing  the  afore- 
said subscriptions  for  the  capital  stock  as  above  provided, 

shares  of  the  capital  stock  of  said  corporation. 

Provided,  That  if  said  (promoter's  name)  shall  have  failed  to 
secure  bona  fide  subscriptions  for  said  capital  stock  in  the  full 
amount  of  $ ,  there  shall  be  issued  to  him  only  such  pro- 
portion of   shares  of  stock  as  the  capital  stock  for 

which  he  has  obtained  subscriptions  is  of  $ ,  the  whole 

amount  for  which  he  hereby  undertakes  to  solicit  subscriptions. 

Provided,  further,  That  if  said  company  be  incorporated  before 
the  time  allowed  said  (promoter's  name)  for  obtaining  subscrip- 
tions has  expired  and  said  (promoter's  name)  shall  thereafter, 
under  the  terms  of  this  contract  secure  additional  bona  fide  sub- 
scriptions for  the  capital  stock  of  said  company,  as  above  pro- 
vided, shares  of  stock  shall  be  issued  within  thirty  days  after  the 
said  time  allowed  for  obtaining  subscriptions  has  expired  to 
(promoter's  name),  or  to  his  assignee,  as  above  provided,  in  the 

proportion  of  one  share  of  stock  for  each  $ of  capital 

stock  for  which  subscriptions  are  so  secured  by  him. 

In  Witness  Whereof,  the  said  subscribers  have  hereunto  at- 
tached their  names  and  designated  the  number  of  shares  taken 
by  each  of  them,  and  said  (promoter's  name)  has  agreed  to  the 

above  terms. 

Shares 


• 

I  agree  to  the  above  terms. 

(Signed  by  promoter) 


Forms  213 

FORM  6 

Underwriting  Agreement 

the  united  states  shipbuilding  company 

A  corporation  to  be  organized  under  the  laws  of  the  state  of 
New  Jersey,  either  by  that  or  some  similar  name,  proposes  to 
acquire  the  plants  and  equipment  of  the  following  concerns,  or 
their  capital  stock,  free  from  any  liens: 

The  Union  Iron  Works,  San  Francisco,  California. 

The  Bath  Iron  Works,  Limited,  and  The  Hyde  Windlass  Com- 
pany, Bath,  Maine. 

The  Crescent  Shipyard  and  The  Samuel  L.  Moore  &  Sons  Co., 
Elizabethport,  New  Jersey. 

The  Eastern  Shipbuilding  Company,  New  London,  Connec- 
ticut. 

The  Harlan  &  Hollingsworth  Co.,  Wilmington,  Delaware. 

The  Canda  Manufacturing  Company,  Carteret,  New  Jersey. 


UNDERWRITING  AGREEMENT 

For  $9,000,000  Series  A  First  Mortgage,  Five  Per  Cent  Sink- 
ing Fund,  Gold  Bonds,  due  1932,  part  of  an  authorized  issue 
of  $16,000,000  bonds  of  $1,000  each,  $5,500,000  being  withdrawn 
from  public  issue  for  disposal  under  the  vendor's  and  subscribers' 
contracts,  and  $1,500,000  being  reserved  in  the  treasury  of  the 
company.  Additional  bonds  may  be  issued  only  for  the  purpose 
of  acquiring  additional  plants  and  equipment  and  for  improve- 
ments and  betterments,  upon  such  terms  and  conditions  as  shall 
be  approved  by  <the  holders  of  a  majority  of  the  bonds  under  the 
present  issue  outstanding  at  the  time  of  such  approval. 


We,  the  undersigned,  each  for  himself,  with  The  Mercantile 
Trust  Company,  for  itself  and  for  the  United  States  Shipbuild- 
ing Company,  and  to  and  with  each  other,  agree  to  subscribe  for, 
receive,  and  pay  for  the  amount  of  5  per  cent  first  mortgage,  sink- 
ing fund,  gold  bonds  of  the  United  States  Shipbuilding  Company 


214  Organizing  a  Business 

of  one  thousand  dollars  each,  set  opposite  our  respective  signa- 
tures hereto,  at  the  price  of  $900  for  each  bond,  25  per  cent  to 
be  paid  upon  allotment  and  the  balance  upon  the  demand  of 
The  Mercantile  Trust  Company. 

We  further  agree  to  receive  and  pay  for  any  smaller  amount 
than  that  subscribed  for  which  may  be  allotted  to  us  respectively. 

The  conditions  of  this  underwriting  agreement  are  as  follows : 

(1)  That  this  agreement  shall  not  be  binding  upon  the  under- 
signed unless  the  entire  amount  of  $9,000,000  of  bonds  shall  have 
been  underwritten. 

(2)  That  within  such  reasonable  time  as  shall  be  fixed  by  The 
Mercantile  Trust  Company  the  said  $9,000,000  of  bonds,  less  any 
amount  withdrawn  by  the  underwriters,  as  hereinafter  set  forth, 
will  be  offered  to  the  public,  through  such  banker  or  bankers  or 
brokers  as  shall  be  designated  by  The  Mercantile  Trust  Company, 
for  subscription  at  not  less  than  95  per  cent. 

(3)  With  the  consent  of  The  Mercantile  Trust  Company,  any 
other  concern  may  be  included  in  this  combination,  or  others  sub- 
stituted therefor,  provided  the  working  efficiency  or  values  are 
not  lessened  or  impaired. 

(4)  That  if  the  amount  of  bonds  subscribed  and  paid  for  upon 
such  public  issues  be  at  least  equal  to  the  amount  of  bonds  so 
offered  to  the  public,  then  all  liability  under  this  agreement  shall 
cease. 

(5)  That  in  case  the  amount  of  bonds  subscribed  for  upon  such 
public  offering  shall  be  less  than  the  total  amount  of  bonds  so 
offered  to  the  public,  or  in  case  the  bonds  subscribed  for  upon 
such  public  issue  shall  not  be  paid  for  to  an  amount  equal,  at 
the  rate  of  95  per  cent,  to  the  total  of  such  public  offering,  then 
such  deficiency  in  subscriptions  and  payments  will,  upon  the  de- 
mand of  The  Mercantile  Trust  Company,  be  made  good  by  the 
subscribers  hereto  in  the  manner  aforesaid,  pro  rata  in  the  pro- 
portion their  subscriptions  for  bonds  not  withdrawn  by  them  from 
public  issue  bear  to  the  total  amount  of  bonds  so  offered  to  the 
public. 

(6)  That  each  underwriter  shall  receive  in  preferred  and  com- 
mon stock  of  the  United  States  Shipbuilding  Company  25  per 


Forms  215 

cent  of  the  par  value  of  the  bonds  hereby  underwritten  in  each 
kind  of  stock,  and  also  that  all  the  proceeds,  not  to  exceed  5  per 
cent,  realized  from  the  sale  of  the  bonds  at  public  issue  in  excess 
of  90  per  cent,  after  deducting  issue  expenses,  shall  belong  to  the 
underwriters. 

(7)  That  any  underwriter  shall  have  the  option  of  withdraw- 
ing from  the  public  issue  any  of  the  bonds  hereby  underwritten 
by  him,  provided  that  he  notify  The  Mercantile  Trust  Company, 
five  days  prior  to  the  date  fixed  for  the  public  issue,  that  he  elects 
to  purchase  said  bonds,  provided  that,  in  the  proportion  of  the 
bonds  so  purchased,  he  waives  his  said  right  to  participate  in 
the  cash  proceeds  realized  from  the  public  issue. 

(8)  That  no  underwriter  shall  sell  or  offer  for  sale  the  bonds 
so  purchased,  nor  any  of  the  bonus  shares  he  receives,  until 
twelve  months  after  the  date  of  payment,  without  the  consent  of 
The  Mercantile  Trust  Company. 

New  York,  April  19,  1902. 

Name  Address  Bonds  Underwritten 


FORM  7 

Certificate  op  Incorporation 

certificate  of  incorporation  of  the  marston  manufacturing 

COMPxWY  3 

We,  the  undersigned,  all  being  of  full  age  and  two-thirds  being 
citizens  of  the  United  States,  and  one  of  us  a  resident  of  the 
state  of  New  York  for  the  purpose  of  forming  a  Corporation 
under  the  Business  Corporations  Law  of  the  state  of  New  York, 
do  hereby  certify  and  set  forth : 

First,  The  name  of  said  Corporation  shall  be 

"Marston  Manufacturing  Company." 

s  Prom  Conyngton  's  Manual  of  Corporate  Management. 
15 


216  Organizing  a  Business 

Second,  The  purposes  for  which  said  Corporation  is  formed  are 
as  follows: 

1.  To  buy,  sell,  manufacture,  and  generally  deal  in  all  man- 
ner of  tools,  machinery,  devices,  appliances,  and  supplies  used 
in  the  cooper's  trade. 

2.  To  lease,  buy,  sell,  use,  and  hold  all  such  property,  real 
or  personal,  as  may  be  necessary  or  convenient  in  connection 
with  the  said  business. 

3.  To  do  any  or  all  things  set  forth  in  this  certificate  as  ob- 
jects, purposes,  powers,  or  otherwise,  to  the  same  extent  and  as 
fully  as  natural  persons  might  do,  and  in  any  part  of  the  world. 
Third,  The  amount  of  Capital  Stock  of  said  Corporation  shall 

be  Fifty  Thousand  ($50,000)  Dollars. 

Fourth,  The  number  of  shares  composing  said  capital  stock 
shall  be  Five  Hundred  (500)  Shares  of  the  par  value  of  One 
Hundred  ($100)  Dollars  each,  and  the  amount  of  capital  with 
which  said  Corporation  will  begin  business  is  Five  Hundred 
($500)  Dollars. 

Fifth,  The  principal  business  office  of  said  Corporation  shall 
be  in  the  Borough  of  Manhattan,  in  the  City,  County,  and  State 
of  New  York. 

Sixth,  The  duration  of  said  Corporation  shall  be  perpetual. 

Seventh,  The  number  of  directors  of  said  Corporation  shall  be 
three. 

Eighth,  The  names  and  post-office  addresses  of  the  directors  of 

said  Corporation  for  the  first  year  are  as  follows: 

Names  Addresses 

Morris  P.  Marston  No.  165  Grand  Ave.,  Brooklyn,  N.  Y. 

John  Adams  No.  30  Broad  St.,  New  York  City- 

Henry  Cornell  Little  Falls,  New  Jersey. 

Ninth,  The  names  and  post-office  addresses  of  the  subscribers  to 
this  certificate,  and  the  number  of  shares  of  stock  which  each 
agrees  to  take  in  said  Corporation,  are  as  follows : 

Names  Addresses  Shares 

Morris  P.  Marston  No.    165   Grand   Ave.,   Brooklyn,  N.   Y.  25 

John  Adams  No.  30  Broad  St.,  New  York  City  10 

Henry  Cornell  Little  Falls,  New  Jersey  10 

William  B.  Amea  Singac,   New  Jersey  5 


Forms  217 

Tenth,  Pursuant  to  Section  40  of  the  Stock  Corporation  Law, 

as  amended,   this   Corporation   shall   have  power  to  purchase, 

acquire,  hold  and  dispose  of  the  stocks,  honds,  and  other  evidences 

of  indebtedness  of  any  corporation,   domestic  or  foreign,  and 

issue  in  exchange  therefor  its  stock,  bonds  or  other  obligations. 

In  Witness  Whereof,  we  have  made  and  signed  this  certificate 

in  duplicate  this  fourteenth  day  of  January,  one  thousand 

nine  hundred  and  three. 

Morris  P.  Marston 
John  Adams 


State  of  New  York 
County  of  New  York 


Henry  Cornell 


William  B.  Ames 

Personally  appeared  before  me  this  14th  day  of  January, 
1903,  Morris  P.  Marston,  John  Adams,  Henry  Cornell  and  Wil- 
liam B.  Ames,  to  me  personally  known  to  be  the  persons  described 
in  and  who  executed  the  foregoing  certificate,  and  severally 
acknowledged  that  they  executed  the  same  for  the  purposes 
therein  set  forth. 

Seth  Lawson, 
(Notarial  Seal)  Notary  Public  for  New  York  County. 

FORM  8 

Charter  op  the  United  States  Steel  Corporation 

certificate  of  amendment  of  original  certificate  of 

incorporation 

United  States  Steel  Corporation,  a  corporation  of  the  State  of 
New  Jersey,  and  the  President  and  the  Secretary  of  said  Com- 
pany, do  hereby  certify  as  follows: 

1.  (Here  follows  the  location  of  the  principal  office  in  New 
Jersey,  and  the  name  of  the  agent  therein  and  in  charge  thereof.) 

2.  The  total  authorized  capital  stock  of  said  corporation,  as  set 

forth  in  its  original  certificate  of  incorporation,  is  $3,000,  divided 

into  30  shares  of  the  par  value  of  $100  each,  of  which  15  shares 

of  the  aggregate  par  value  of  $1,500  are  to  be  preferred  stock, 

and  15  shares  of  the  aggregate  par  value  of  $1,500  are  to  be 
15 


218  Organizing  a  Business 

common  stock.  Such  total  authorized  capital  stock,  consisting  of 
15  shares  of  the  preferred  stock  and  15  shares  of  the  common 
stock,  of  the  aggregate  par  value  of  $3,000,  was  subscribed  for 
by  the  incorporators  as  set  forth  in  the  said  original  certificate 
of  incorporation. 

3.  The  Board  of  Directors  of  said  corporation,  at  a  meeting  of 
said  Board  duly  held,  passed  a  resolution  declaring  that  the 
changes  and  amendments  hereinafter  set  forth  are  advisable, 
and  calling  a  meeting  of  the  stockholders  to  take  action  thereon. 

4.  Such  meeting  of  the  stockholders  was  thereupon  duly  held 
pursuant  to  such  call  of  the  Board  of  Directors,  upon  notice  given 
to  each  stockholder  as  provided  in  the  by-laws.  At  said  meeting 
all  of  the  incorporators  and  stockholders  of  said  corporation  were 
personally  present,  and  more  than  two-thirds  in  interest  of  each 
class  of  the  stockholders  having  voting  powers — namely,  all  of 
the  incorporators  and  all  of  the  stockholders  of  said  corporation 
— voted  in  favor  of  such  changes  and  amendments,  which  were 
accordingly  adopted.  Such  changes  and  amendments  are  as 
follows : 

A.  That  Article  IV  of  the  Certificate  of  Incorporation  of  said 
company  be  amended  so  as  to  read  as  follows: 

IV.  The  total  authorized  capital  stock  of  the  corporation  is 
eleven  hundred  million  dollars  ($1,100,000,000),  divided  into 
eleven  million  shares  of  the  par  value  of  one  hundred  dollars  each. 
Of  such  total  authorized  capital  stock,  five  million  five  hundred 
thousand  shares,  amounting  to  five  hundred  and  fifty  million  dol- 
lars, shall  be  preferred  stock,  and  five  million  five  hundred  thou- 
sand shares,  amounting  to  five  hundred  and  fifty  million  dollars, 
shall  be  common  stock. 

From  time  to  time  the  preferred  stock  and  the  common  stock 
may  be  increased  according  to  law,  and  may  be  issued  in  such 
amounts  and  proportions  as  shall  be  determined  by  the  Board  of 
Directors  and  as  may  be  permitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  receive, 
when  and  as  declared,  from  the  surplus  or  net  profits  of  the  cor- 
poration yearly  dividends  at  the  rate  of  seven  per  centum  per 
annum,  and  no  more,  payable  quarterly  on  dates  to  be  fixed  by 


Forms  219 

the  by-laws.  The  dividends  on  the  preferred  stock  shall  be  cumu- 
lative, and  shall  be  payable  before  any  dividend  on  the  common 
stock  shall  be  paid  or  set  apart ;  so  that  if  in  any  year  dividends 
amounting  to  seven  per  cent  shall  not  have  been  paid  thereon,  the 
deficiency  shall  be  payable  before  any  dividends  shall  be  paid 
upon  or  set  apart  for  the  common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred  stock  for 
all  previous  years  shall  have  been  declared,  and  shall  have  be- 
come payable,  and  the  accrued  quarterly  installments  for  the 
current  year  shall  have  been  declared,  and  the  company  shall 
have  paid  such  cumulative  dividends  for  previous  years  and 
such  accrued  Quarterly  installments,  or  shall  have  set  aside  from 
its  surplus  or  net  profits  a  sum  sufficient  for  the  payment  thereof, 
the  Board  of  Directors  may  declare  dividends  on  the  common 
stock,  payable  then  or  thereafter,  out  of  any  remaining  surplus 
or  net  profits. 

In  the  event  of  any  liquidation  or  dissolution  or  winding  up 
(whether  voluntary  or  involuntary)  of  the  corporation,  the 
holders  of  the  preferred  stock  shall  be  entitled  to  be  paid  in  full 
both  the  par  amount  of  their  shares  and  the  unpaid  dividends 
accrued  thereon  before  any  amount  shall  be  paid  to  the  holders 
of  the  common  stock;  and  after  the  payment  to  the  holders  of 
the  preferred  stock  of  its  par  value  and  the  unpaid  accrued  divi- 
dends thereon,  the  remaining  assets  and  funds  shall  be  divided 
and  paid  to  the  holders  of  the  common  stock  according  to  their 
respective  shares. 

And  that  the  capital  stock  of  said  Company  be  increased  ac- 
cordingly to  $1,100,000,000,  divided  into  11,000,000  shares  of  the 
par  value  of  $100  each,  of  which  amount  5,500,000  shares  amount- 
ing to  $550,000,000  shall  be  preferred  stock,  with  the  rights  and 
preferences  aforesaid,  and  5,500,000  shares  amounting  to  $550,- 
000,000  shall  be  common  stock. 

B.  That  the  fifth  paragraph  of  Article  VII  of  the  said  certifi- 
cate of  incorporation  be  amended  so  as  to  read  as  follows : 

Unless  authorized  by  votes  given  in  person  or  by  proxy  by 
stockholders  holding  at  least  two-thirds  of  the  capital  stock  of 
the  corporation,  which  is  represented  and  voted  upon  in  person 


220  Organizing  a  Business 

or  by  proxy  at  a  meeting  specially  called  for  that  purpose,  or 
at  an  annual  meeting,  the  Board  of  Directors  shall  not  mortgage 
or  pledge  any  of  its  real  property,  or  any  shares  of  the  capital 
stock  of  any  other  corporation ;  but  this  prohibition  shall  not  be 
construed  to  apply  to  the  execution  of  any  purchase-money  mort- 
gage or  any  other  purchase-money  lien. 

As  authorized  by  the  Act  of  the  Legislature  of  the  State  of 
New  Jersey,  passed  March  22,  1901,  amending  the  seventeenth 
section  of  the  Act  Concerning  Corporations  (Revision  of  1896), 
any  action  which  theretofore  required  the  consent  of  the  holders 
of  two-thirds  of  the  stock,  at  any  meeting  after  notice  to  them 
given,  or  required  their  consent  in  writing  to  be  filed,  may  be 
taken  upon  the  consent  of,  and  the  consent  given  and  filed  by,  the 
holders  of  two-thirds  of  the  stock  of  each  class  represented  at 
such  meeting  in  person  or  by  proxy. 

C.  That  the  certificate  of  incorporation  of  said  United  States 
Steel  Corporation,  as  amended,  shall  read  as  follows: 

AMENDED 

Certificate  of  Incorporation 

of 

United  States  Steel  Corporation 

We,  the  undersigned,  in  order  to  form  a  corporation  for  the 
purposes  hereinafter  stated,  under  and  pursuant  to  the  provisions 
of  the  Act  of  the  Legislature  of  the  State  of  New  Jersey,  entitled 
"An  Act  concerning  Corporations  (Revision  of  1896),"  and  the 
acts  amendatory  thereof  and  supplemental  thereto,  do  hereby 
certify  as  follows: 

I.  The  name  of  the  Corporation  is 

"United  States  Steel  Corporation." 

II.  (Here  follows  the  location  of  the  principal  office  in  New 
Jersey,  and  the  name  of  the  agent  therein  and  in  charge  thereof.) 

III.  The  objects  for  which  the  corporation  is  formed  are : 

To  manufacture  iron,  steel,  manganese,  coke,  copper,  lumber 
and  other  materials,  and  all  or  any  articles  consisting,  or  partly 


Forms  221 

consisting,  of  iron,  steel,  copper,  wood  or  other  materials,  and 
all  or  any  products  thereof. 

To  acquire,  own,  lease,  occupy,  use  or  develop  any  lands  con- 
taining coal  or  iron,  manganese,  stone  or  other  ores,  or  oil,  and 
any  wood  lands,  or  other  lands  for  any  purpose  of  the  company. 

To  mine  or  otherwise  to  extract  or  remove,  coal,  ores,  stone 
and  other  minerals  and  timber  from  any  lands  owned,  acquired, 
leased  or  occupied  by  the  Company,  or  from  any  other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in  iron,  steel, 
manganese,  copper,  stone,  ores,  coal,  coke,  wood,  lumber  and 
other  materials,  and  any  of  the  products  thereof,  and  any  articles 
consisting  or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships,  boats,  en- 
gines, cars  and  other  equipment,  railroads,  docks,  ships,  elevators, 
water  works,  gas  works,  and  electric  works,  viaducts,  aqueducts, 
canals  and  other  waterways,  and  any  other  means  of  transporta- 
tion, and  to  sell  the  same,  or  otherwise  to  dispose  thereof,  or  to 
maintain  and  operate  the  same,  except  that  the  Company  shall 
not  maintain  or  operate  any  railroad  or  canal  in  the  State  of 
New  Jersey. 

To  apply  for,  obtain,  register,  purchase,  lease  or  otherwise  to 
acquire,  and  to  hold,  use,  own,  operate  and  introduce,  and  to 
sell,  assign  or  otherwise  to  dispose  of,  any  trade-marks,  trade- 
names, patents,  inventions,  improvements  and  processes  used  in 
connection  with  or  secured  under  letters  patent  of  the  United 
States,  or  elsewhere  or  otherwise,  and  to  use,  exercise,  develop, 
grant  licenses  in  respect  of,  or  otherwise  to  turn  to  account  any 
such  trade-marks,  patents,  licenses,  processes  and  the  like,  or  any 
such  property  or  rights. 

To  engage  in  any  other  manufacturing,  mining,  construction 
or  transportation  business  of  any  kind  or  character  whatsoever, 
and  to  that  end  to  acquire,  hold,  own  and  dispose  of  any  and 
all  property,  assets,  stocks,  bonds  and  rights  of  any  and  every 
kind,  but  not  to  engage  in  any  business  hereunder  which  shall 
require  the  exercise  of  the  right  of  eminent  domain  within  the 
State  of  New  Jersey. 

To  acquire  by  purchase,  subscription  or  otherwise,  and  to  hold 


222  Organizing  a  Business 

or  to  dispose  of  stocks,  bonds  or  any  other  obligations  of  any 
corporation  formed  for,  or  then  or  theretofore  engaged  in  or 
pursuing,  any  one  or  more  of  the  kinds  of  business,  purposes, 
objects  or  operations  above  indicated,  or  owning  or  holding  any 
property  of  any  kind  herein  mentioned,  or  of  any  corporation 
owning  or  holding  the  stocks  or  the  obligations  of  any  such 
corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell  or  dispose  of, 
any  stock,  bonds  or  other  obligations  of  any  such  other  corpora- 
tion ;  to  aid  in  any  manner  any  corporation  whose  stock,  bonds  or 
other  obligations  are  held  or  in  any  manner  guaranteed  by  the 
Company,  and  to  do  any  other  acts  or  things  for  the  preserva- 
tion, protection,  improvement  or  enhancement  of  the  value  of 
any  such  stock,  bonds  or  other  obligations,  or  to  do  any  acts  or 
things  designed  for  any  such  purpose ;  and,  while  owner  of  any 
such  stock,  bonds  or  other  obligations,  to  exercise  all  the  rights, 
powers  and  privileges  of  ownership  thereof,  and  to  exercise  any 
and  all  voting  power  thereon. 

The  business  or  purpose  of  the  Company  is  from  time  to  time 
to  do  any  one  or  more  of  the  acts  and  things  herein  set  forth; 
and  it  may  conduct  its  business  in  other  States,  and  in  the  Terri- 
tories, and  in  foreign  countries,  and  may  have  one  office,  or  more 
than  one  office,  and  keep  the  books  of  the  Company  outside  of 
the  State  of  New  Jersey,  except  as  otherwise  may  be  provided  by 
law;  and  may  hold,  purchase,  mortgage  and  convey  real  and 
personal  property,  either  in  or  out  of  the  State  of  New  Jersey. 

Without  in  any  particular  limiting  any  of  the  objects  and 
powers  of  the  corporation,  it  is  hereby  expressly  declared  and 
provided  that  the  corporation  shall  have  power  to  issue  bonds 
and  other  obligations  in  payment  for  property  purchased  or 
acquired  by  it,  or  for  any  other  object  in  or  about  its  business ; 
to  mortgage  or  pledge  any  stocks,  bonds  or  other  obligations,  or 
any  property  which  may  be  acquired  by  it,  to  secure  any  bonds 
or  other  obligations  by  it  issued  or  incurred;  to  guarantee  any 
dividends,  or  bonds,  or  contracts,  or  other  obligations;  to  make 
and  perform  contracts  of  any  kind  and  description  and  in  carry- 
ing on  its  business,  or  for  the  purpose  of  attaining  or  furthering 


Forms  223 

any  of  its  objects,  to  do  any  and  all  other  acts  and  things,  and 
to  exercise  any  and  all  other  powers  which  a  copartnership  or 
natural  person  could  do  and  exercise,  and  which  now  or  hereafter 
may  be  authorized  by  law. 

IV.  The  total  authorized  capital  stock  of  the  corporation  is 
eleven  hundred  million  dollars  ($1,100,000,000),  divided  into 
eleven  million  shares  of  the  par  value  of  one  hundred  dollars 
each.  Of  such  total  authorized  capital  stock,  five  million  five 
hundred  thousand  shares,  amounting  to  five  hundred  and  fifty 
million  dollars,  shall  be  preferred  stock,  and  five  million  five 
hundred  thousand  shares,  amounting  to  five  hundred  and  fifty 
million  dollars,  shall  be  common  stock. 

From  time  to  time,  the  preferred  stock  and  the  common  stock 
may  be  increased  according  to  law,  and  may  be  issued  in  such 
amounts  and  proportions  as  shall  be  determined  by  the  Board  of 
Directors,  and  as  may  be  permitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  receive 
when  and  as  declared,  from  the  surplus  or  net  profits  of  the  cor- 
poration, yearly  dividends  at  the  rate  of  seven  per  centum  per 
annum,  and  no  more,  payable  quarterly  on  dates  to  be  fixed  by 
the  by-laws.  The  dividends  on  the  preferred  stock  shall  be  cumu- 
lative, and  shall  be  payable  before  any  dividend  on  the  common 
stock  shall  be  paid  or  set  apart ;  so  that,  if  in  any  year  dividends 
amounting  to  seven  per  cent  shall  not  have  been  paid  thereon, 
the  deficiency  shall  be  payable  before  any  dividends  shall  be 
paid  upon  or  set  apart  for  the  common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred  stock  for 
all  previous  years  shall  have  been  declared  and  shall  have  be- 
come payable,  and  the  accrued  quarterly  installments  for  the 
current  year  shall  have  been  declared,  and  the  Company  shall 
have  paid  such  cumulative  dividends  for  previous  years  and 
such  accrued  quarterly  installments,  or  shall  have  set  aside 
from  its  surplus  or  net  profits  a  sum  sufficient  for  the  payment 
thereof,  the  Board  of  Directors  may  declare  dividends  on  the 
common  stock,  payable  then  or  thereafter,  out  of  any  remaining 
surplus  or  net  profits. 

In  the  event  of  any  liquidation  or  dissolution  or  winding  up 


224  Organizing  a  Business 

(whether  voluntary  or  involuntary)  of  the  corporation,  the 
holders  of  the  preferred  stock  shall  be  entitled  to  be  paid  in 
full  both  the  par  amount  of  their  shares  and  the  unpaid  divi- 
dends accrued  thereon,  before  any  amount  shall  be  paid  to  the 
holders  of  the  common  stock;  and  after  the  payment  to  the 
holders  of  the  preferred  stock  of  its  par  value,  and  the  unpaid 
accrued  dividends  thereon,  the  remaining  assets  and  funds  shall 
be  divided  and  paid  to  the  holders  of  the  common  stock  accord- 
ing to  their  respective  shares. 

V.  The  names  and  post-office  addresses  of  the  incorporators, 
and  the  number  of  shares  of  stock  for  which  severally  and  re- 
spectively we  do  hereby  subscribe  (the  aggregate  of  our  said  sub- 
scriptions being  three  thousand  dollars,  is  the  amount  of  capital 
stock  with  which  the  corporation  will  commence  business),  are 
as  follows: 

(Here  follow  the  names  and  post-office  addresses  of  each  of 
the  incorporators,  and  the  number  of  shares  of  stock  subscribed 
for  by  each.) 

VI.  The  duration  of  the  corporation  shall  be  perpetual. 

VII.  The  number  of  Directors  of  the  Company  shall  be  fixed 
from  time  to  time  by  the  by-laws ;  but  the  number,  if  fixed  at  more 
than  three,  shall  be  some  multiple  of  three.  The  Directors  shall 
be  classified  with  respect  to  the  time  for  which  they  shall  sev- 
erally hold  office  by  dividing  them  into  three  classes,  each  con- 
sisting of  one-third  of  the  whole  number  of  the  Board  of  Di- 
rectors. The  Directors  of  the  first  class  shall  be  elected  for  a 
term  of  one  year ;  the  Directors  of  the  second  class  for  a  term  of 
two  years;  and  the  Directors  of  the  third  class  for  a  term  of 
three  years;  and  at  each  annual  election  the  successors  to  the 
class  of  Directors  whose  terms  shall  expire  in  that  year  shall  be 
elected  to  hold  office  for  the  term  of  three  years,  so  that  the  term 
of  office  of  one  class  of  Directors  shall  expire  in  each  year. 

The  number  of  the  Directors  may  be  increased  as  may  be  pro- 
vided in  the  by-laws.  In  case  of  any  increase  of  the  number  of 
the  Directors  the  additional  Directors  shall  be  elected  as  may  be 
provided  in  the  by-laws  by  the  Directors  or  by  the  Stockholders 
at  an  annual  or  special  meeting;  and  one-third  of  their  number 


Forms  225 

shall  be  elected  for  the  then  unexpired  portion  of  the  term  of  the 
Directors  of  the  first  class,  one-third  of  their  number  for  the 
unexpired  portion  of  the  term  of  the  Directors  of  the  second 
class,  and  one-third  of  their  number  for  the  unexpired  portion 
of  the  term  of  the  Directors  of  the  third  class,  so  that  each  class 
of  Directors  shall  be  increased  equally. 

In  case  of  any  vacancy  in  any  class  of  Directors  through  death, 
resignation,  disqualification  or  other  cause,  the  remaining  Di- 
rectors, by  affirmative  vote  of  a  majority  of  the  Board  of  Direct- 
ors, may  elect  a  successor  to  hold  office  for  the  unexpired  portion 
of  the  term  of  the  Director  whose  place  shall  be  vacant,  and  until 
the  election  of  a  successor. 

The  Board  of  Directors  shall  have  power  to  hold  their  meetings 
outside  of  the  State  of  New  Jersey  at  such  places  as  from  time 
to  time  may  be  designated  by  the  by-laws  or  by  resolution  of 
the  Board.  The  by-laws  may  prescribe  the  number  of  Directors 
necessary  to  constitute  a  quorum  of  the  Board  of  Directors,  which 
number  may  be  less  than  a  majority  of  the  whole  number  of  the 
Directors. 

Unless  authorized  by  votes  given  in  person  or  by  proxy  by 
Stockholders  holding  at  least  two-thirds  of  the  capital  stock  of 
the  corporation,  which  is  represented  and  voted  upon  in  person 
or  by  proxy  at  a  meeting  specially  called  for  that  purpose,  or  at 
an  annual  meeting,  the  Board  of  Directors  shall  not  mortgage  or 
pledge  any  of  its  real  property,  or  any  shares  of  the  capital  stock 
of  any  other  corporation;  but  this  prohibition  shall  not  be  con- 
strued to  apply  to  the  execution  of  any  purchase-money  mortgage 
or  any  other  purchase-money  lien. 

As  authorized  by  the  Act  of  the  Legislature  of  the  State  of  New 
Jersey,  passed  March  22,  1901,  amending  the  seventeenth  section 
of  the  Act  concerning  Corporations  (Revision  of  1896),  any 
action  which  theretofore  required  the  consent  of  the  holders  of 
two-thirds  of  the  stock  at  any  meeting,  after  notice  to  them  given, 
or  required  their  consent  in  writing  to  be  filed,  may  be  taken 
upon  the  consent  of,  and  the  consent  given  and  filed  by  the  holders 
of  two-thirds  of  the  stock  of  each  class  represented  at  such  meet- 
ing in  person  or  by  proxy. 


226  Organizing  a  Business 

Any  officer  elected  or  appointed  by  the  Board  of  Directors  may 
be  removed  at  any  time  by  the  affirmative  vote  of  a  majority  of 
the  whole  Board  of  Directors. 

Any  other  officer  or  employe  of  the  Company  may  be  removed 
at  any  time  by  vote  of  the  Board  of  Directors,  or  by  any  com- 
mittee or  superior  officer  upon  whom  such  power  of  removal  may 
be  conferred  by  the  by-laws  or  by  vote  of  the  Board  of  Directors. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority 
of  the  whole  board,  may  appoint  from  the  Directors  an  execu- 
tive committee,  of  which  a  majority  shall  constitute  a  quorum; 
and,  to  such  extent  as  shall  be  provided  in  the  by-laws,  such  com- 
mittee shall  have  and  may  exercise  all  or  any  of  the  powers  of 
the  Board  of  Directors,  including  power  to  cause  the  seal  of  the 
corporation  to  be  affixed  to  all  papers  that  may  require  it. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority 
of  the  whole  board,  may  appoint  any  other  Standing  Committees, 
and  such  Standing  Committees  shall  have  and  may  exercise  such 
powers  as  shall  be  conferred  or  authorized  by  the  by-laws. 

The  Board  of  Directors  may  appoint  not  only  other  officers  of 
the  Company,  but  also  one  or  more  vice-presidents,  one  or  more 
assistant  treasurers,  and  one  or  more  assistant  secretaries;  and, 
to  the  extent  provided  in  the  by-laws,  the  persons  so  appointed 
respectively  shall  have  and  may  exercise  all  the  powers  of  the 
president,  of  the  treasurer  and  of  the  secretary  respectively. 

The  Board  of  Directors  shall  have  power  from  time  to  time  to 
fix  and  to  determine  and  to  vary  the  amount  of  the  working  capi- 
tal of  the  Company ;  and  to  direct  and  determine  the  use  and  dis- 
position of  any  surplus  or  net  profits  over  and  above  the  capital 
stock  paid  in;  and  in  its  discretion  the  Board  of  Directors  may 
use  and  apply  any  such  surplus  or  accumulated  profits  in  pur- 
chasing or  acquiring  its  bonds  or  other  obligations,  or  shares  of 
its  own  capital  stock,  to  such  extent  and  in  such  manner  and  upon 
such  terms  as  the  Board  of  Directors  shall  deem  expedient;  but 
shares  of  such  capital  stock  so  purchased  or  acquired  may  be 
resold,  unless  such  shares  shall  have  been  retired  for  the  purpose 
of  decreasing  the  Company's  capital  stock  as  provided  by  law. 

The  Board  of  Directors  from  time  to  time  shall  determine 


Forms  227 

whether  and  to  what  extent,  and  at  what  times  and  places,  and 
under  what  conditions  and  regulations,  the  accounts  and  books 
of  the  corporation,  or  any  of  them,  shall  be  open  to  the  inspection 
of  the  stockholders,  and  no  stockholder  shall  have  any  right  to 
inspect  any  account  or  book  or  document  of  the  corporation,  ex- 
cept as  conferred  by  Statute  or  authorized  by  the  Board  of  Di- 
rectors or  by  a  resolution  of  the  stockholders. 

Subject  always  to  by-laws  made  by  the  Stockholders,  the  Board 
of  Directors  may  make  by-laws,  and,  from  time  to  time,  may 
alter,  amend  or  repeal  any  by-laws;  but  any  by-laws  made  by 
the  Board  of  Directors  may  be  altered  or  repealed  by  the  Stock- 
holders at  any  annual  meeting,  or  at  any  special  meeting,  pro- 
vided notice  of  such  proposed  alteration  or  repeal  be  included  in 
the  notice  of  the  meeting. 

In  Witness  Whereof,  we  have  hereunto  set  our  hands  and  seals 
the  23d  day  of  February,  1901. 

(Signatures  of  Incorporators) 
( Acknowledgment ) 

5.  The  written  assent  and  signatures  of  all  the  Incorporators 
and  Stockholders  of  said  United  States  Steel  Corporation  to  the 
foregoing  amendments  and  changes  is  hereto  appended. 

In  Witness  Whereof,  the  said  United  States  Steel  Corporation 
has  caused  this  certificate  to  be  signed  by  its  President,  and  its 
Secretary,  and  its  corporate  seal  to  be  hereto  affixed,  this  1st  day 
of  April,  1901. 

(Signatures  of  President  and  Secretary,  and  Corporate  Seal) 

( Acknowledgment ) 

We,  the  undersigned,  being  all  the  Incorporators  and  Stock- 
holders of  the  United  States  Steel  Corporation,  having,  at  a  meet- 
ing regularly  called  for  that  purpose,  voted  in  favor  of  the 
changes  and  amendments  set  forth  in  the  above  certificate,  do 
now,  pursuant  to  law,  hereby  give  our  written  consent  to  the  said 
changes  and  alterations. 

Witness  our  hands  this  1st  day  of  April,  A.  D.  1901. 

(Here  follow  signatures  of  Incorporators  and  Stockholders) 

( Acknowledgment ) 


228  Organizing  a  Business 

FORM  9 
Object  Clauses 

The  purpose  for  which  a  corporation  is  formed  is  per- 
haps the  most  important  part  of  the  certificate  of  incor- 
poration. The  objects  and  purposes  of  the  corporation 
should  be  stated  in  the  fullest  and  clearest  manner  possi- 
ble, because  the  company  cannot  undertake  any  business 
not  authorized  by  its  charter.  No  action  by  the  board  of 
directors  can  make  an  illegal  exercise  of  power  valid.  It 
is  not  sufficient  to  insert  such  general  words  as  ' '  in  gen- 
eral, to  carry  on  any  other  business,  whether  manufactur- 
ing or  otherwise."  The  courts  will  limit  such  words  to 
operations  of  a  nature  similar  to  the  business  previously 
mentioned  and  will  not  include  any  wholly  new  business. 
The  addition  of  general  words  of  this  character  after  a 
specific  enumeration  of  powers  does  not  add  to  the  enu- 
merated powers  of  a  corporation. 

In  view  of  this  fact  the  following  object  clauses  will  aid 
greatly  in  defining  the  objects  and  purposes  of  a  cor- 
poration. One  should  always  note  whether  these  objects 
are  authorized  under  the  statutes  of  the  state  in  which 
one  is  incorporating. 

DEPARTMENT    STORE  4 

To  buy,  lease,  construct,  or  otherwise  acquire  storerooms,  ware- 
houses, and  other  buildings ;  to  buy  and  sell  all  kinds  of  merchan- 
dise ;  to  equip,  conduct,  and  operate  a  general  department  store ; 
to  establish  therein  stores  for  the  purchase  and  sale  of  dry  goods, 
millinery,  cloth,  and  fabrics,  gents'  furnishing  goods,  women's 
clothing,  men's  and  boys'  clothing,  hats,  boots  and  shoes,  fur- 
niture, carpets  and  draperies,  drugs  and  chemicals,  hardware, 
china  and  glassware,  silver,  jewelry,  pictures,  books,  stationery, 
photographs  and  photographers'  supplies,  perfumery,  toilet  ar- 

i  Wood,  Modern  Business  Corporations. 


Forms  229 

tides,  and  bicycles.     (Enumeration  made  to  cover  any  classes  of 
business  desired.) 

AUTOMOBILES 

To  purchase,  lease,  and  acquire  lands  and  buildings  for  use  as 
manufactories,  warehouses,  and  offices ;  to  manufacture,  buy,  sell, 
import,  and  export  vehicles  of  all  kinds  propelled  by  mechanical 
power;  engines  and  appliances  for  the  generation  and  use  of 
steam,  electricity,  gasoline,  or  other  form  of  power  for  propelling 
carriages,  wagons,  trucks,  cars,  and  vehicles  of  every  kind  and 
description ;  all  parts  and  portions  of  such  vehicles,  engines,  and 
machinery,  and  all  things  incident  to  or  used  in  connection  with 
the  same. 

AGRICULTURAL  IMPLEMENTS 

To  purchase,  lease,  or  otherwise  acquire  lands  and  buildings 
for  the  erection  and  operation  of  factories,  workshops,  and  ware- 
houses with  suitable  equipment  for  manufacturing  and  selling 
agricultural  implements;  to  manufacture,  buy,  sell,  import,  ex- 
port, and  deal  in  agricultural  implements  and  machinery  of  all 
kinds,  including  implements  for  stirring,  pulverizing,  and  pre- 
paring the  soil,  planting,  harvesting,  conveying,  and  threshing 
crops,  and  for  otherwise  conducting  the  operations  of  agriculture. 

CHEMICAL  COMPANY 

To  buy,  lease,  erect,  and  acquire,  hold,  own,  and  manage  real 
estate  and  buildings  for  manufactories  and  warehouses ;  to  manu- 
facture, buy,  sell,  import,  export,  and  deal  in  chemicals  and 
drugs  of  all  kinds;  to  analyze  and  refine  all  kinds  of  chemicals, 
drugs,  and  preparations  thereof ;  to  conduct  the  business  of  man- 
ufacturers and  dealers  in  chemicals,  drugs,  medicines,  compounds, 
druggists'  sundries,  chemical,  surgical,  and  scientific  apparatus 
and  machinery;  to  invent,  devise,  purchase,  acquire,  and  use 
secret  processes,  and  processes  protected  by  patents  and  trade- 
marks ;  and  to  apply  for,  register,  purchase,  and  procure  patents 
and  trade-marks,  granting  exclusive  rights  to  make,  vend,  sell, 


230  Organizing  a  Business 

and  use  compounds,  preparations,  medicines,  drugs,  and  chemical 
compositions. 

APARTMENT  HOUSES 

To  purchase,  lease,  or  otherwise  acquire  real  estate  necessary 
to  the  operations  of  the  company ;  to  buy,  lease,  build,  erect,  equip, 
operate,  maintain,  and  sell  apartment  houses  and  residence  hotels ; 
to  purchase,  lease,  install,  and  operate  furnaces,  boilers,  and  ma- 
chinery; to  supply  heat,  steam,  water,  electricity,  and  other 
means  for  heating,  lighting,  power,  signalling,  and  other  pur- 
poses; to  construct,  install,  lease,  own,  and  operate  telephone 
exchanges  in  buildings  owned  or  operated. 

CONTRACTORS  AND  BUILDERS 

To  build,  repair,  remodel,  construct,  and  equip  houses,  build- 
ings, roads,  streets,  sidewalks,  pavements,  sewers,  tunnels,  sub- 
ways, ditches,  conduits,  reservoirs,  railways,  systems  of  water- 
works, manufactories,  and  all  structures  of  wood,  stone,  brick, 
cement,  iron,  steel,  or  other  building  material. 

HOTEL  COMPANY 

To  purchase,  lease,  acquire,  own,  and  occupy  lands  and  build- 
ings; to  erect,  construct,  equip,  operate,  manage,  and  maintain 
houses  and  buildings  for  hotels,  apartment  houses,  dwellings, 
offices,  and  business  structures  for  the  accommodation  of  the  pub- 
lic and  of  individuals ;  to  lease,  rent,  and  let  the  same  to  tenants 
and  guests ;  to  manufacture,  furnish,  and  sell  to  tenants  and  oc- 
cupants of  such  buildings,  heat,  light,  steam,  water,  electricity, 
and  power;  to  equip,  furnish,  keep,  manage,  and  operate  restau- 
rants, cafes,  bars,  lunch  rooms,  tea  rooms,  billiard  halls,  and  bar- 
ber shops  for  the  accommodation  of  the  public  and  of  individuals. 

FORM  10 

By-laws  op  the  United  States  Steel  Corporation 

As  on  March  1,  1910 

ARTICLE  I. STOCKHOLDERS 

Section  1.  Annual  Meeting.  The  annual  meeting  of  the  stock- 
holders of  the  Company  shall  be  held  annually  at  the  principal 


Forms  231 

office  of  the  Company  in  the  State  of  New  Jersey,  at  twelve 
o'clock  noon,  on  the  third  Monday  in  April  in  each  year,  if  not 
a  legal  holiday,  and  if  a  legal  holiday  then  on  the  next  succeeding 
Monday  not  a  legal  holiday,  for  the  purpose  of  electing  directors, 
and  for  the  transaction  of  such  other  business  as  may  be  brought 
before  the  meeting;  and  the  terms  of  office  of  the  directors  of 
the  several  classes  shall  continue  until  the  election  of  their  suc- 
cessors at  such  meeting  as  provided  in  Article  II  hereof. 

It  shall  be  the  duty  of  the  Secretary  to  cause  notice  of  each  an- 
nual meeting  to  be  published  once  in  each  of  the  four  calendar 
weeks  next  preceding  the  meeting  in  at  least  one  newspaper  in 
each  of  the  following  places :  Jersey  City,  N.  J.,  New  York,  N.  Y., 
Chicago,  111.,  and  Pittsburg,  Pa.  Nevertheless,  a  failure  to  pub- 
lish such  notice,  or  any  irregularity  in  such  notice,  or  in  the  pub- 
lication thereof,  shall  not  affect  the  validity  of  any  annual  meet- 
ing, or  of  any  proceedings  at  any  such  meeting. 

Section  2.  Special  Meetwigs.  Special  meetings  of  the  stock- 
holders may  be  held  at  the  principal  office  of  the  Company  in 
the  State  of  New  Jersey,  whenever  called  in  writing,  or  by  vote, 
by  a  majority  of  the  Board  of  Directors. 

Notice  of  each  special  meeting,  indicating  briefly  the  object  or 
objects  thereof,  shall  by  the  secretary  be  published  once  in  each 
of  the  four  calendar  weeks  next  preceding  the  meeting,  in  at  least 
one  newspaper  in  each  of  the  following  places :  Jersey  City,  N.  J., 
New  York,  N.  Y.,  Chicago,  111.,  and  Pittsburg,  Pa.  Nevertheless, 
if  all  the  stockholders  shall  waive  notice  of  a  special  meeting,  no 
notice  of  such  meeting  shall  be  required ;  and  whenever  all  the 
stockholders  shall  meet  in  person  or  by  proxy,  such  meeting  shall 
be  valid  for  all  purposes  without  call  or  notice,  and  at  such 
meeting  any  corporate  action  may  be  taken. 

Section  3.  Quorum.  At  any  meeting  of  the  stockholders  the 
holders  of  one-third  of  all  of  the  shares  of  the  capital  stock  of 
the  Company,  present  in  person  or  represented  by  proxy,  shall 
constitute  a  quorum  of  the  stockholders  for  all  purposes,  unless 
the  representation  of  a  larger  number  shall  be  required  by  law, 
and,  in  that  case,  the  representation  of  the  number  so  required, 
shall  constitute  a  quorum. 

16 


232  Organizing  a  Business 

If  the  holders  of  the  amount  of  stock  necessary  to  constitute  a 
quorum  shall  fail  to  attend  in  person  or  by  proxy  at  the  time 
and  place  fixed  by  these  by-laws  for  an  annual  meeting,  or  fixed 
by  notice  as  above  provided  for  a  special  meeting  called  by  the 
directors,  a  majority  in  interest  of  the  stockholders  present  in 
person  or  by  proxy  may  adjourn,  from  time  to  time,  without 
notice  other  than  by  announcement  at  the  meeting,  until  holders 
of  the  amount  of  stock  requisite  to  constitute  a  quorum  shall 
attend.  At  any  such  adjourned  meeting  at  which  a  quorum  shall 
be  present,  any  business  may  be  transacted  which  might  have 
been  transacted  at  the  meeting  as  originally  notified. 

Section  4.  Organization.  The  chairman  of  the  Board,  and 
in  his  absence,  the  chairman  of  the  Finance  Committee,  and  in 
the  absence  of  both,  the  president,  shall  call  meetings  of  the  stock- 
holders to  order,  and  shall  act  as  chairman  of  such  meetings.  The 
Board  of  Directors  or  Finance  Committee  may  appoint  any  stock- 
holder to  act  as  chairman  of  any  meeting  in  the  absence  of  the 
chairman  of  the  Board  and  of  the  chairman  of  the  Finance  Com- 
mittee and  of  the  president. 

The  secretary  of  the  Company  shall  act  as  secretary  at  all 
meetings  of  the  stockholders ;  but  in  the  absence  of  the  secretary 
at  any  meeting  of  the  stockholders  the  presiding  officer  may  ap- 
point any  person  to  act  as  secretary  of  the  meeting. 

Section  5.  Voting.  At  each  meeting  of  the  stockholders,  every 
stockholder  shall  be  entitled  to  vote  in  person,  or  by  proxy  ap- 
pointed by  instrument  in  writing,  subscribed  by  such  stockholder 
or  by  his  duly  authorized  attorney,  and  delivered  to  the  inspectors 
at  the  meeting ;  and  he  shall  have  one  vote  for  each  share  of  stock 
standing  registered  in  his  name  at  the  time  of  the  closing  of  the 
transfer  books  for  said  meeting.  The  votes  for  directors,  and, 
upon  demand  of  any  stockholder,  the  votes  upon  any  question 
before  the  meeting,  shall  be  by  ballot. 

At  each  meeting  of  the  stockholders,  a  full,  true  and  complete 
list,  in  alphabetical  order,  of  all  of  the  stockholders  entitled  to 
vote  at  such  meeting,  and  indicating  the  number  of  shares  held 
by  each,  certified  by  the  secretary  or  by  the  treasurer,  shall  be 
furnished.    Only  the  persons  in  whose  names  shares  of  stock  stand 


Forms  233 

on  the  books  of  the  Company  at  the  time  of  the  closing  of  the 
transfer  books  for  such  meeting,  as  evidenced  by  the  list  of  stock- 
holders so  furnished,  shall  be  entitled  to  vote  in  person  or  by 
proxy  on  the  shares  so  standing  in  their  names. 

Prior  to  any  meeting,  but  subsequent  to  the  time  of  closing 
the  transfer  books  for  such  meeting,  any  proxy  may  submit  his 
powers  of  attorney  to  the  secretary,  or  to  the  treasurer,  for  ex- 
amination. The  certificate  of  the  secretary,  or  of  the  treasurer, 
as  to  the  regularity  of  such  powers  of  attorney,  and  as  to  the 
number  of  shares  held  by  the  persons  who  severally  and  re- 
spectively executed  such  powers  of  attorney,  shall  be  received 
as  prima  facie  evidence  of  the  number  of  shares  represented  by 
the  holder  of  such  powers  of  attorney  for  the  purpose  of  estab- 
lishing the  presence  of  a  quorum  at  such  meeting  and  of  organiz- 
ing the  same,  and  for  all  other  purposes. 

Section  6.  Inspectors.  At  each  meeting  of  the  stockholders, 
the  polls  shall  be  opened  and  closed,  the  proxies  and  ballots  shall 
be  received  and  be  taken  in  charge,  and  all  questions  touching 
the  qualification  of  voters  and  the  validity  of  proxies  and  the 
acceptance  or  rejection  of  votes,  shall  be  decided  by  three  in- 
spectors. Such  inspectors  shall  be  appointed  by  the  Board  of 
Directors  before  or  at  the  meeting,  or,  if  no  such  appointment 
shall  have  been  made,  then  by  the  presiding  officer  at  the  meeting. 
If  for  any  reason  any  of  the  inspectors  previously  appointed  shall 
fail  to  attend  or  refuse  or  be  unable  to  serve,  inspectors  in  place 
of  any  so  failing  to  attend  or  refusing  or  unable  to  attend,  shall 
be  appointed  in  like  manner. 

ARTICLE  II. — BOARD  OF  DIRECTORS 

Section  1.  Number,  Classification  and  Term  of  Office.  The 
business  and  the  property  of  the  Company  shall  be  managed 
and  controlled  by  the  Board  of  Directors. 

As  provided  in  the  certificate  of  incorporation,  the  directors 
shall  be  classified  in  respect  of  the  time  for  which  they  shall  sev- 
erally hold  office,  by  dividing  them  into  three  classes,  each  class 
consisting  of  one-third  of  the  whole  number  of  the  Board  of  Di- 
rectors. The  directors  of  the  first  class  shall  be  elected  for  a 
16 


234  Organizing  a  Business 

term  of  one  year;  the  directors  of  the  second  class  shall  be  elected 
for  a  term  of  two  years ;  and  the  directors  of  the  third  class  shall 
be  elected  for  a  term  of  three  years.  At  each  annual  election, 
the  successors  to  the  directors  of  the  class  whose  term  shall  expire 
in  that  year,  shall  be  elected  to  hold  office  for  the  term  of  three 
years,  so  that  the  term  of  office  of  one  class  of  directors  shall  ex- 
pire in  each  year. 

The  number  of  directors  shall  be  twenty-four ;  but  the  number 
of  directors  may  be  altered  from  time  to  time  by  the  alteration  of 
these  by-laws. 

In  case  of  any  increase  of  the  number  of  directors,  the  addi- 
tional directors  shall  be  elected  by  the  directors  then  in  office; 
one-third  of  such  additional  directors  for  the  unexpired  portion 
of  the  term  of  one  year;  one-third  for  the  unexpired  portion  of 
the  term  of  two  years;  and  one-third  for  the  unexpired  portion 
of  the  term  of  three  years,  so  that  each  class  of  directors  shall  be 
increased  equally. 

Every  director  shall  be  a  holder  of  at  least  one  share  of  the 
capital  stock  of  the  Company.  Each  director  shall  serve  for  the 
term  for  which  he  shall  have  been  elected,  and  until  his  successor 
shall  have  been  duly  chosen. 

At  all  elections  of  the  directors,  the  polls  shall  remain  open 
for  at  least  one  hour,  unless  every  registered  owner  of  shares  has 
sooner  voted  in  person  or  by  proxy,  or  in  writing  has  waived  the 
statutory  provision. 

Section  2.  Vacancies.  In  ease  of  any  vacancy  in  the  directors 
of  any  class  through  death,  resignation,  disqualification  or  other 
cause,  the  remaining  directors,  by  affirmative  vote  of  a  majority 
thereof,  may  elect  a  successor  to  hold  office  for  the  unexpired  por- 
tion of  the  term  of  the  director  whose  place  shall  be  vacant,  and 
until  the  election  of  his  successor. 

Such  vacancy  shall  be  filled  upon  and  after  nominations  there- 
for shall  have  been  made  by  the  Finance  Committee. 

Section  3.  Place  of  Meeting,  etc.  The  directors  may  hold 
their  meetings,  and  may  have  an  office  and  keep  the  books  of  the 
Company  (except  as  otherwise  may  be  provided  for  by  law)  in 
such  place  or  places  in  the  State  of  New  Jersey  or  outside  of  the 


Forms  235 

State  of  New  Jersey,  as  the  Board  from  time  to  time  may 
determine. 

Section  4.  Regular  Meetings.  Regular  meetings  of  the  Board 
of  Directors  shall  be  held  monthly  on  the  last  Tuesday  of  each 
month,  if  not  a  legal  holiday,  and  if  a  legal  holiday,  then  on  the 
next  succeeding  Tuesday  not  a  legal  holiday.  No  notice  shall  be 
required  for  any  such  regular  monthly  meeting  of  the  Board. 

Section  5.  Special  Meetings.  Special  meetings  of  the  Board 
of  Directors  shall  be  held  whenever  called  by  direction  of  the 
chairman  of  the  Board,  or  the  chairman  of  the  Finance  Commit- 
tee, or  the  president,  or  of  one-third  of  the  directors  for  the  time 
being  in  office. 

The  secretary  shall  give  notice  of  each  special  meeting  by  mail- 
ing the  same  at  least  two  days  before  the  meeting,  or  by  tele- 
graphing the  same  at  least  one  day  before  the  meeting,  to  each 
director;  but  such  notice  may  be  waived  by  any  director.  Un- 
less otherwise  indicated  in  the  notice  thereof,  any  and  all  busi- 
ness may  be  transacted  at  a  special  meeting.  At  any  meeting 
at  which  every  director  shall  be  present,  even  though  without  any 
notice,  any  business  may  be  transacted. 

Section  6.  Quorum.  Ten  Directors  shall  constitute  a  quorum 
for  the  transaction  of  business;  but  if  at  any  meeting  of  the 
Board  there  be  less  than  a  quorum  present,  a  majority  of  those 
present  may  adjourn  the  meeting  from  time  to  time. 

The  affirmative  vote  of  at  least  one-third  of  all  the  directors 
for  the  time  being  in  office  shall  be  necessary  for  the  passage  of 
any  resolution. 

Section  7.  Order  of  Business.  At  meetings  of  the  Board  of 
Directors  business  shall  be  transacted  in  such  order  as,  from  time 
to  time,  the  Board  may  determine  by  resolution. 

At  all  meetings  of  the  Board  of  Directors,  the  chairman  of  the 
Board,  or  in  his  absence  the  chairman  of  the  Finance  Commit- 
tee, or,  in  the  absence  of  both  of  these  officers,  the  President  shall 
preside. 

Section  8.  Contracts.  Inasmuch  as  the  directors  of  this  Com- 
pany are  men  of  large  and  diversified  business  interests,  and  are 
likely  to  be  connected  with  other  corporations  with  which  from 


236  Organizing  a  Business 

time  to  time  this  Company  must  have  business  dealings,  no  con- 
tract or  other  transaction  between  this  Company  and  any  other 
corporation  shall  be  affected  by  the  fact  that  directors  of  this 
Company  are  interested  in,  or  are  directors  or  officers  of,  such 
other  corporation,  if,  at  the  meeting  of  the  Board,  or  of  the  com- 
mittee of  this  Company,  making,  authorizing  or  confirming  such 
contract  or  transaction,  there  shall  be  present  a  quorum  of  di- 
rectors not  so  interested;  and  any  director  individually  may  be 
a  party  to,  or  may  be  interested  in,  any  contract  or  transaction 
of  this  Company,  provided  that  such  contract  or  transaction  shall 
be  approved  or  be  ratified  by  the  affirmative  vote  of  at  least  ten 
directors  not  so  interested. 

The  Board  of  Directors  in  its  discretion  may  submit  any  con- 
tract or  act  for  approval  or  ratification  at  any  annual  meeting  of 
the  stockholders,  or  at  any  meeting  of  the  stockholders  called 
for  the  purpose  of  considering  any  such  act  or  contract ;  and  any 
contract  or  act  that  shall  be  approved  or  be  ratified  by  the  vote 
of  the  holders  of  a  majority  of  the  capital  stock  of  the  Company 
which  is  represented  in  person  or  by  proxy  at  such  meeting 
(provided  that  a  lawful  quorum  of  stockholders  be  there  repre- 
sented in  person  or  by  proxy)  shall  be  as  valid  and  as  binding 
upon  the  corporation  and  upon  all  the  stockholders  as  though 
it  had  been  approved  or  ratified  by  every  stockholder  of  the 
corporation. 

Section  9.  Compensation  of  Directors.  For  his  attendance 
at  any  meeting  of  the  Board  of  Directors,  or  of  any  committee, 
every  director  shall  receive  an  allowance  of  twenty  dollars  for 
attendance  at  each  meeting. 

Section  10.  Election  of  Officers  and  Committees.  At  the  first 
regular  meeting  of  the  Board  of  Directors  in  each  year  (at  which 
a  quorum  shall  be  present)  held  next  after  the  annual  meeting, 
the  Board  of  Directors  shall  proceed  to  the  election  of  the  execu. 
tive  officers  of  the  Company,  and  of  the  Finance  Committee  to 
be  elected  by  the  Board  of  Directors  under  the  provisions  of  Ar- 
ticle III  and  Article  IV  of  the  By-Laws. 


Forms  237 

ARTICLE  III. FINANCE   COMMITTEE 

Section  1.  The  Board  of  Directors  shall  elect  from  the  di- 
rectors a  Finance  Committee,  and  shall  designate  for  such  com- 
mittee a  chairman,  who  shall  continue  to  be  chairman  of  the  com- 
mittee during  the  pleasure  of  the  Board  of  Directors. 

The  Board  of  Directors  shall  fill  vacancies  in  the  Finance 
Committee  by  election  from  the  directors;  and  at  all  times  it 
shall  be  the  duty  of  the  Board  of  Directors  to  keep  the  member- 
ship of  such  committee  full,  with  due  regard  to  the  qualifications 
for  such  membership  indicated  in  this  Article  of  the  By-Laws. 

All  action  by  the  Finance  Committee  shall  be  reported  to  the 
Board  of  Directors  at  its  meeting  next  succeeding  such  action, 
and  shall  be  subject  to  revision  or  alteration  by  the  Board  of 
Directors ;  provided,  that  no  rights  or  acts  of  third  parties  shall 
be  affected  by  any  such  revision  or  alteration. 

The  Finance  Committee  shall  fix  its  own  rules  of  proceeding, 
and  shall  meet  where  and  as  provided  by  such  rules,  or  by  resolu- 
tion of  the  Board  of  Directors,  but  in  every  case  the  presence  of 
at  least  four  members  shall  be  necessary  to  constitute  a  quorum. 

In  every  case  the  affirmative  vote  of  a  majority  of  all  of  the 
members  of  the  committee  present  at  the  meeting,  shall  be  nec- 
essary to  its  adoption  of  any  resolution. 

Section  2.  The  Finance  Committee  shall  consist  of  seven  mem- 
bers, besides  the  chairman  of  the  Board  and  the  president,  each 
of  whom,  by  virtue  of  his  office,  shall  be  a  member  of  the  Finance 
Committee.  So  far  as  practicable  each  of  the  seven  elected  mem- 
bers of  the  Finance  Committee  shall  be  a  person  of  experience  in 
matters  of  finance.  Unless  otherwise  ordered  by  the  Board  of  Di- 
rectors, each  elected  member  of  the  Finance  Committee  shall 
continue  to  be  a  member  thereof  until  the  expiration  of  his  term 
of  office  as  a  director. 

The  Finance  Committee  shall  have  special  charge  and  control 
of  all  financial  affairs  of  the  Company.  The  president,  the  vice- 
presidents,  the  general  counsel,  the  treasurer,  the  comptroller 
and  the  secretary,  and  their  respective  offices  shall  be  under  the 
direct  control  and  supervision  of  the  Finance  Committee,  and 

of  its  chairman  when  the  Committee  is  not  in  session. 
16a 


238  Organizing  a  Business 

During  the  intervals  between  the  meetings  of  the  Board  of 
Directors,  the  Finance  Committee  shall  possess,  and  may  exer- 
cise, all  the  powers  of  the  Board  of  Directors,  in  the  management 
of  all  the  affairs  of  the  Company,  including  its  purchases  of 
property,  and  the  execution  of  legal  instruments  with  or  with- 
out the  corporate  seal  in  such  manner  as  said  committee  shall 
deem  to  be  best  for  the  interests  of  the  Company,  in  all  cases  in 
which  specific  directions  shall  not  have  been  given  by  the  Board 
of  Directors. 

During  the  intervals  between  the  meetings  of  the  Finance  Com- 
mittee, and  subject  to  its  review,  the  chairman  of  the  Board  and 
the  chairman  of  the  Finance  Committee  together,  shall  possess, 
and  may  exercise  any  of  the  powers  of  the  committee,  except  as 
from  time  to  time  shall  be  otherwise  provided  by  resolution  of 
the  Board  of  Directors. 

Except  as  otherwise  provided  by  the  By-Laws,  or  by  resolution 
of  the  Board  of  Directors,  all  salaries  and  compensations  paid  or 
payable  by  the  Company  shall  be  fixed  by  the  Finance  Committee. 

No  director  not  an  executive  officer  shall  become  a  salaried  em- 
ploye of  the  Company  except  by  special  vote  of  the  Finance 
Committee. 

ARTICLE  IV. — OFFICERS 

Section  1.  Officers.  The  executive  officers  of  the  Company 
shall  be  a  chairman  of  the  Board  of  Directors,  a  chairman  of  the 
Finance  Committee,  a  president,  a  vice-president,  or  more  than 
one  vice-president,  a  general  counsel,  a  treasurer,  a  secretary  and 
a  comptroller,  all  of  whom  shall  be  elected  by  the  Board  of 
Directors. 

The  Board  of  Directors  may  appoint  such  other  officers  as  they 
shall  deem  necessary,  who  shall  have  such  authority  and  shall 
perform  such  duties  as  from  time  to  time  may  be  prescribed  by 
the  Board  of  Directors. 

One  person  may  hold  more  than  one  office. 

In  its  discretion,  the  Board  of  Directors  by  a  vote  of  a  majority 
thereof  may  leave  unfilled  for  any  such  period  as  it  may  fix  by 
resolution,  any  office  except  those  of  president,  treasurer,  secre- 
tary and  comptroller. 


Forms  239 

All  officers  and  agents  shall  be  subject  to  removal  at  any  time 
by  the  affirmative  vote  of  a  majority  of  the  whole  Board  of  Di- 
rectors. All  officers,  agents  and  employes,  other  than  officers 
appointed  by  the  Board  of  Directors,  shall  hold  office  at  the  dis- 
cretion of  the  committee  or  of  the  officer  appointing  them. 

Each  of  the  salaried  officers  of  the  corporation  shall  devote  his 
entire  time,  skill  and  energy  to  the  business  of  the  corporation, 
unless  the  contrary  is  expressly  consented  to  by  the  Board  of 
Directors  or  the  Finance  Committee.  No  vacation  shall  be  taken 
by  any  of  such  officers  except  by  consent  of  the  Board  of  Directors 
or  the  Finance  Committee. 

The  Finance  Committee  shall  have  power  to  remove  all  officers, 
agents  and  employes  of  the  Company,  except  officers  elected  or 
appointed  by  the  Board  of  Directors. 

Section  2.  Powers  cmd  Duties  of  the  Chairman  of  the  Board. 
The  chairman  of  the  Board  of  Directors  shall  be  the  chief  execu- 
tive officer  of  the  corporation  and,  subject  to  the  Board  of  Di- 
rectors and  Finance  Committee,  shall  be  in  general  charge  of  the 
affairs  of  the  corporation.  He  shall  preside  at  all  meetings  of 
the  stockholders  and  of  the  Board  of  Directors;  and  by  virtue 
of  his  office  shall  be  a  member  of  the  Finance  Committee. 

Section  3.  Powers  and  Duties  of  the  President.  In  the  ab- 
sence of  the  Chairman  of  the  Board  and  the  Chairman  of  the 
Finance  Committee,  the  president  shall  preside  at  all  meetings 
of  the  stockholders  and  of  the  Board  of  Directors.  By  virtue 
of  his  office  he  shall  be  a  member  of  the  Finance  Committee. 
Subject  to  the  Board  of  Directors  and  the  Finance  Committee, 
he  shall  have  general  charge  of  the  business  of  the  corporation 
relating  to  manufacturing,  mining  and  transportation  and  gen- 
eral operation.  He  shall  keep  the  Board  of  Directors  and  the 
Finance  Committee  and  the  Chairman  of  the  Board  and  the 
Chairman  of  the  Finance  Committee  fully  informed,  and  shall 
freely  consult  them  concerning  the  business  of  the  corporation 
in  his  charge.  He  may  sign  and  execute  all  authorized  bonds, 
contracts,  checks  or  other  obligations  in  the  name  of  the  corpora- 
tion, and  with  the  treasurer  or  an  assistant  treasurer  may  sign  all 
certificates  of  the  shares  in  the  capital  stock  of  the  corporation. 


240  Organizing  a  Business 

He  shall  do  and  perform  such  other  duties  as  from  time  to  time 
may  be  assigned  to  him  by  the  Board  of  Directors. 

Section  4.  Vice-Presidents.  The  Board  of  Directors  may  ap- 
point a  vice-president  or  more  than  one  vice-president.  Each 
vice-president  shall  have  such  powers,  and  shall  perform  such 
duties,  as  may  be  assigned  to  him  by  the  Board  of  Directors  or 
the  Finance  Committee. 

Section  5.  The  General  Counsel.  The  general  counsel  shall 
be  the  chief  consulting  officer  of  the  Company  in  all  legal  mat- 
ters, and  subject  to  the  Board  of  Directors  and  the  Finance  Com- 
mittee, shall  have  general  control  of  all  matters  of  legal  import 
concerning  the  Company. 

Section  6.  Powers  and  Duties'  of  Treasurer.  The  treasurer 
shall  have  custody  of  all  the  funds  and  securities  of  the  Company 
which  may  have  come  into  his  hands ;  when  necessary  or  proper 
he  shall  endorse  on  behalf  of  the  Company,  for  collection,  checks, 
notes  and  other  obligations,  and  shall  deposit  the  same  to  the 
credit  of  the  Company  in  such  bank  or  banks  or  depositary  as 
the  Board  of  Directors  or  the  Finance  Committee  may  designate ; 
he  shall  sign  all  receipts  and  vouchers  for  payments  made  to  the 
Company;  jointly  with  such  other  officer  as  may  be  designated 
by  the  Finance  Committee,  he  shall  sign  all  checks  made  by  the 
Company,  and  shall  pay  out  and  dispose  of  the  same  under  the 
direction  of  the  Board  or  of  the  Finance  Committee;  he  shall 
sign  with  the  president,  or  such  other  person  or  persons  as  may 
be  designated  for  the  purpose  by  the  Board  of  Directors  or  the 
Finance  Committee,  all  bills  of  exchange  and  promissory  notes 
of  the  Company ;  he  may  sign,  with  the  president  or  a  vice-presi- 
dent, all  certificates  of  shares  in  the  capital  stock ;  whenever  re- 
quired by  the  Board  of  Directors  or  by  the  Finance  Committee, 
he  shall  render  a  statement  of  his  cash  account;  he  shall  enter 
regularly,  in  books  of  the  Company  to  be  kept  by  him  for  the 
purpose,  full  and  accurate  account  of  all  moneys  received  and 
paid  by  him  on  account  of  the  Company ;  he  shall,  at  all  reason- 
able times,  exhibit  his  books  and  accounts  to  any  director  of  the 
Company  upon  application  at  the  office  of  the  Company  during 
business  hours;  and  he  shall  perform  all  acts  incident  to  the 


Forms  241 

position  of  treasurer,  subject  to  the  control  of  the  Board  of  Di- 
rectors or  of  the  Finance  Committee. 

He  shall  give  a  bond  for  the  faithful  discharge  of  his  duties 
in  such  sum  as  the  Board  of  Directors  or  the  Finance  Committee 
may  require. 

Section  7.  Assistant  Treasurers.  The  Board  of  Directors  or 
the  Finance  Committee  may  appoint  an  assistant  treasurer  or 
more  than  one  assistant  treasurer.  Each  assistant  treasurer  shall 
have  such  powers  and  shall  perform  such  duties  as  may  be  as 
signed  to  him  by  the  Board  of  Directors,  or  by  the  Finance 
Committee. 

Section  8.  Powers  and  Duties  of  Secretary.  The  secretary 
shall  keep  the  minutes  of  all  meetings  of  the  Board  of  Directors, 
and  the  minutes  of  all  meetings  of  the  stockholders,  and  also 
(unless  otherwise  directed  by  the  Finance  Committee)  the  min- 
utes of  all  committees,  in  books  provided  for  that  purpose;  he 
shall  attend  to  the  giving  and  serving  of  all  notices  of  the  Com- 
pany; he  may  sign  with  the  president  in  the  name  of  the  Com- 
pany, all  contracts  authorized  by  the  Board  of  Directors  or  by 
the  Finance  Committee,  and,  when  so  ordered  by  the  Board  of 
Directors  or  the  Finance  Committee,  he  shall  affix  the  seal  of  the 
Company  thereto;  he  shall  have  charge  of  the  certificate  books, 
transfer  books  and  stock  ledgers,  and  such  other  books  and 
papers  as  the  Board  of  Directors  or  the  Finance  Committee  may 
direct,  all  of  which  shall,  at  all  reasonable  times,  be  open  to  the 
examination  of  any  director,  upon  application  at  the  office  of 
the  Company  during  business  hours ;  and  he  shall  in  general  per- 
form all  the  duties  incident  to  the  office  of  secretary,  subject  to 
the  control  of  the  Board  of  Directors  and  of  the  Finance  Com- 
mittee. The  offices  of  secretary  and  of  treasurer  may  be  held  by 
one  and  the  same  person. 

Section  9.  Assistant  Secretaries.  The  Board  of  Directors  or 
the  Finance  Committee  may  appoint  one  assistant  secretary  or 
more  than  one  assistant  secretary.  Each  assistant  secretary  shall 
have  such  powers  and  shall  perform  such  duties  as  may  be  as- 
signed to  him  by  the  Board  of  Directors  or  by  the  Finance 
Committee. 


242  Organizing  a  Business 

Section  10.  Comptroller.  The  Comptroller  shall  be  the  prin- 
cipal officer  in  charge  of  the  accounts  of  the  Company,  and  shall 
perform  such  duties  as  from  time  to  time  may  be  assigned  to 
him  by  the  Board  of  Directors  or  the  Finance  Committee. 

Section  11.  Voting  upon  Stocks.  Unless  otherwise  ordered  by 
the  Board  of  Directors  or  by  the  Finance  Committee,  the  chair- 
man of  the  Board  or  the  chairman  of  the  Finance  Committee 
shall  have  full  power  and  authority  in  behalf  of  the  Company  to 
attend  and  to  act  and  to  vote  at  any  meetings  of  stockholders  of 
any  corporation  in  which  the  Company  may  hold  stock,  and  at 
any  such  meeting  shall  possess  and  may  exercise  any  and  all  the 
rights  and  powers  incident  to  the  ownership  of  .such  stock,  and 
which,  as  the  owner  thereof,  the  Company  might  have  possessed 
and  exercised  if  present.  The  Board  of  Directors  or  the  Finance 
Committee,  by  resolution,  from  time  to  time,  may  confer  like 
powers  upon  any  other  person  or  persons. 

ARTICLE  V. — CAPITAL  STOCK — SEAL 

Section  1.  Certificates  of  SJmres.  The  certificates  for  shares 
of  the  capital  stock  of  the  Company  shall  be  in  such  form,  not 
inconsistent  with  the  certificate  of  incorporation,  as  shall  be  pre- 
pared or  be  approved  by  the  Board  of  Directors.  The  certificates 
shall  be  signed  by  the  president  or  a  vice-president,  and  also  by 
the  treasurer  or  an  assistant  treasurer. 

All  certificates  shall  be  consecutively  numbered.  The  name 
of  the  person  owning  the  shares  represented  thereby,  with  the 
number  of  such  shares  and  the  date  of  issue,  shall  be  entered  on 
the  Company's  books. 

No  certificate  shall  be  valid  unless  it  is  signed  by  the  president 
or  a  vice-president,  and  by  the  treasurer  or  an  assistant  treasurer. 

All  certificates  surrendered  to  the  Company  shall  be  canceled, 
and  no  new  certificate  shall  be  issued  until  the  former  certificate 
for  the  same  number  of  shares  of  the  same  class  shall  have  been 
surrendered  and  canceled. 

Section  2.  Transfer  of  Shares.  Shares  in  the  capital  stock 
of  the  Company  shall  be  transferred  only  on  the  books  of  the 
Company  by  the  holder  thereof  in  person,  or  by  his  attorney, 


Forms  243 

upon  surrender  and  cancellation  of  certificates  for  a  like  number 
of  shares. 

Section  3.  Regulations.  The  Board  of  Directors,  and  the 
Finance  Committee  also,  shall  have  power  and  authority  to  make 
all  such  rules  and  regulations  as  respectively  they  may  deem 
expedient,  concerning  the  issue,  transfer  and  registration  of  cer- 
tificates for  shares  of  the  capital  stock  of  the  Company. 

The  Board  of  Directors  or  the  Finance  Committee  may  appoint 
a  transfer  agent  and  a  registrar  of  transfers,  and  may  require  all 
stock  certificates  to  bear  the  signature  of  such  transfer  agent  and 
of  such  registrar  of  transfers. 

Section  4.  Closing  of  Transfer  Books.  The  stock  transfer 
books  shall  be  closed  for  the  meetings  of  the  stockholders,  and 
for  the  payment  of  dividends,  during  such  periods  as  from  time 
to  time  may  be  fixed  by  the  Board  of  Directors  or  by  the  Finance 
Committee,  and  during  such  periods  no  stock  shall  be  transferable. 

Section  5.  Dividends.  The  Board  of  Directors  may  declare 
dividends  from  the  surplus  or  from  the  net  profits  of  the  Com- 
pany. 

The  dates  for  the  declaration  of  dividends  upon  the  preferred 
stock  and  upon  the  common  stock  of  the  Company  shall  be  the 
days  by  these  By-Laws  fixed  for  the  regular  monthly  meetings 
of  the  Board  of  Directors  in  the  months  of  April,  July,  October 
and  January  in  each  year,  on  which  days,  the  Board  of  Directors 
in  its  discretion  shall  declare  what,  if  any,  dividends  shall  be 
declared  upon  the  preferred  stock  and  the  common  stock,  or 
either  of  such  stocks. 

The  dividends  upon  the  preferred  stock,  if  declared,  severally 
and  respectively,  shall  be  payable  quarterly  upon  the  day  pre- 
ceding the  last  day  of  May,  of  August,  of  November,  and  of 
February  in  each  year. 

The  dividends  upon  the  common  stock,  if  declared,  severally 
and  respectively,  shall  be  payable  quarterly  on  the  day  preceding 
the  last  day  of  June,  of  September,  of  December  and  of  March 
in  each  year. 

If  the  date  herein  appointed  for  the  payment  of  any  dividend 
shall  in  any  year  fall  upon  a  legal  holiday,  then  the  dividend  pay- 


244  Organizing  a  Business 

able  on  such  date  shall  be  paid  on  the  next  preceding  day  not  a 
legal  holiday. 

Section  6.  Working  Capital.  The  directors  shall  not  be  re- 
quired in  January  in  each  year,  after  reserving  over  and  above 
its  capital  stock  paid  in,  as  a  working  capital  for  said  corpora- 
tion, such  sum,  if  any,  as  shall  have  been  fixed  by  the  stockholders, 
to  declare  a  dividend  among  its  stockholders  of  the  whole  of  its 
accumulated  profits  exceeding  the  amount  so  reserved,  and  pay 
the  same  to  such  stockholders  on  demand;  but  the  Board  of 
Directors  may  fix  a  sum  which  may  be  set  aside  or  reserved,  over 
and  above  the  Company's  capital  paid  in,  as  a  working  capital 
for  the  Company,  and  from  time  to  time  they  may  increase, 
diminish  and  vary  the  same  in  their  absolute  judgment  and 
discretion. 

Section  7.  Corporate  Seal.  The  Board  of  Directors  shall  pro- 
vide a  suitable  seal,  containing  the  name  of  the  Company,  which 
seal  shall  be  in  charge  of  the  secretary.  If  and  when  so  directed 
by  the  Board  of  Directors  or  by  the  Finance  Committee,  a  dupli- 
cate of  the  seal  may  be  kept  and  be  used  by  the  treasurer  or  by 
any  assistant  secretary  or  assistant  treasurer. 

ARTICLE  VI. — AMENDMENTS 

Section  1.  The  Board  of  Directors  shall  have  power  to  make, 
amend  and  repeal  the  By-Laws  of  the  Company,  by  vote  of  a 
majority  of  all  of  the  directors,  at  any  regular  or  special  meeting 
of  the  Board,  provided  that  notice  of  intention  to  make,  amend  or 
repeal  the  By-Laws  in  whole  or  in  part  shall  have  been  given  at 
the  next  preceding  meeting;  or  without  any  such  notice,  by  a 
vote  of  two-thirds  of  all  the  directors. 


Forms 


245 


FORM  11 

Simple  Subscription  List 

subscription  list 
ABC  Mercantile  Company 

A  corporation  to  be  organized  under  the  laws  of  the  state  of 

Illinois  for  conducting  a  general  merchandise  business 

in  the  city  of  Chicago 

Capital  Stock  $200,000 
Shares  $100  each 

We,  the  undersigned,  hereby  severally  subscribe  at  par  value 
thereof  for  the  number  of  shares  of  the  capital  stock  of  the  ABC 
Mercantile  Company  set  opposite  our  respective  names,  and  agree 
to  pay  for  the  same  in  cash  on  demand  of  its  Treasurer  so  soon 
as  the  company  is  organized. 

Chicago,  Illinois,  December  1,  1915 


Names 

Addresses 

Shares 

Amount 

Such  subscriptions  may  be  revoked  at  the  will  of  the 
subscribers  at  any  time  before  the  company  is  actually 
organized.  In  order  to  avoid  the  possibility  of  revoca- 
tion, many  subscription  lists  provide  for  the  appointment 
of  trustees  to  act  as  the  other  party  to  the  subscription 
agreement.  When  the  corporation  is  organized,  it  takes 
the  place  of  the  trustees  and  the  contract  then  exists  be- 
tween the  subscribers  and  the  corporation.  When  such 
a  trust  agreement  is  included  in  the  subscription  list,  it 
should  include  a  clause  similar  to  this : 

We,  the  undersigned,  hereby  agree  with  the  U.  S.  Trust 
Company  as  trustees  for  the  incorporation  of  the  ABC  Mer- 
cantile Company,  and  do  hereby  severally  subscribe  for  the  num- 
Der  of  shares  of  the  stock  of  said  company  set  opposite  our 


246  Organizing  a  Business 

respective  signatures,  and  agree  to  pay  the  value  thereof  as  fol- 
lows :  10  per  cent  on  demand  to  the  U.  S.  Trust  Company  as 
trustees  for  the  said  company  and  the  remainder  to  the  treasurer 
of  the  company  on  demand  after  the  incorporation  of  said 
company. 

Other  agreements  and  clauses  may  be  included  in  the 
subscription  agreement,  such  as  provisions  for  install- 
ment payments,  donations  of  full  paid  and  non-assessable 
shares  of  common  stock  as  a  bonus  to  subscriptions  of 
preferred  stock,  fixing  of  a  time  limit  by  which  the  pro- 
posed company  must  be  organized,  and  similar  provisions. 

A  stock  subscription  agreement  may  be  executed  in 
separate  instruments  with  the  same  force  and  effect  as 
if  all  the  signatures  thereto  were  affixed  to  a  single  in- 
strument. When  subscriptions  are  to  be  secured  from 
parties  widely  scattered,  it  is  often  desirable  to  use  an 
individual  subscription  blank.  The  preceding  form  may 
easily  be  modified  for  this  purpose. 

FORM  12 

Subscription  Blank  for  Use  after  Organization 

subscription  blank 

ABC  Mercantile  Company 

Chicago,  Illinois 


Capital  Stock  $200,000 
Shares  $100  each 

Enclosed  find  certified  check  for dollars,  payment  for 

shares  of  the  full  paid  and  non-assessable  stock  of  the 

ABC  Mercantile  Company,  to  be  issued  in  the  name  and  mailed 

to  the  address  given  below. 

Dated 


All  applications  are  subject  to  acceptance  by  the  ABC  Mer- 
cantile Company. 


Forms  247 

FORM  13 

Installment  Scrip 

No Shares $ 

INSTALLMENT   SCRIP 

ABC  Mercantile  Company 
Chicago,  Illinois 

This  is  to  certify  that ,  a  subscriber  for 

shares  of  the  capital  stock  of  the  ABC  Mercantile  Company  at 
its  par  value  of  $100  per  share,  has  paid  into  the  treasury  of  the 
company,  on  account  of  said  subscription  and  in  accordance  with 

its  terms,  the  sum  of dollars,  the installment 

of per  cent  each  upon  his  subscription. 

Upon  payment  of  all  the  installments  of  said  subscription  and 
surrender  of  all  outstanding  installment  scrip  certificates,  full 

paid  certificates  for  said shares  of  stock  will  be  issued 

to  the  order  of  said  subscriber. 


President 
Secretary 


Chicago,  Illinois 
19.. 


FORM  14 

Installment  Notice  for  Subscriptions  Payable  on  Demand 

installment  notice 
ABC  Mercantile  Company 
Chicago,  Illinois 
Dear  Sir: 
You  are  hereby  notified  that  by  resolution  of  the  Board  of 

Directors  an  installment  of per  cent  on  subscriptions 

for  the  stock  of  this  company  has  been  called  to  be  paid  to  the 

17. 


248 


Organizing  a  Business 


treasurer  of  the  company  on  or  before  the 


day  of 


Treasurer 


Chicago,  Illinois, ,  19 . 

Shares  subscribed 

Amount  of  assessment  $ 


FORM  15 

First  Meeting  of  Stockholders 
call  and  waiver  of  notice 


FIRST  MEETING  OF  STOCKHOLDERS 


We,  the  undersigned,  all  the  incorporators  and  stockholders 
of  the  ABC  Mercantile  Company,  do  hereby  call  the  first  meet- 
ing of  its  stockholders  in  the  office  of  the  company  at 

Street,  Chicago,  Illinois,  at  o'clock   on  the 

day  of ,  19.  . ,  for  the  organization  of  the  com- 
pany and  the  transaction  of  all  such  other  business  as  may  be 
incident  thereto,  and  we  hereby  waive  all  requirements  as  to 
notice  of  such  meetings  and  consent  to  the  transaction  thereat 
of  any  and  all  business  pertaining  to  the  affairs  of  the  company. 

Chicago,  Illinois, ,  19 . . 

(Signatures)      

This  form  may  easily  be  modified  for  a  call  of  the  first 
meeting  of  the  directors.  These  calls  and  waivers  are 
used  where  the  charter  itself  or  the  statutes  of  the  state 
do  not  provide  for  the  first  meeting  of  the  stockholders 
or  directors.  Until  the  company  is  organized  through  its 
board  of  directors  and  officers,  it  has  no  mechanism  by 
which  to  transact  its  business.    In  Illinois  this  condition 


Forms  249 

is  partially  corrected  by  authorizing  the  petitioners  to 
act  as  commissioners  for  carrying  on  the  necessary  busi- 
ness until  the  first  meeting  of  the  stockholders  and  the 
election  of  directors. 

FORM  16 

President's  Call  for  Special  Meeting  of  Stockholders 

ABC  Mercantile  Company 
Chicago,  Illinois 

Mr ,  Secretary  ABC  Mercantile  Company. 

You  are  hereby  authorized  and  instructed  to  notify  the  stock- 
holders of  this  company  that  a  special  meeting  of  the  stockholders 
has  been  called  by  me  to  be  held  in  the  office  of  the  Company 

,  Chicago,  Illinois,  on  the day  of , 

19.  . ,  at o'clock ,  for  the  purpose  of  consider- 
ing and  acting  upon  the  proposition  of 


and  all  business  in  connection  therewith  that  may  properly  come 
before  said  meeting. 
19.. 


President 

This  form  may  easily  be  modified  for  notice  of  spe- 
cial meetings  of  directors.  Where  the  stockholders  or 
directors  can  easily  get  together,  special  meetings  are 
frequently  held  upon  call  and  waiver.  The  call  is  then 
signed  by  the  stockholders  or  directors  who  agree  to 
waive  all  statutory  and  by-law  requirements  as  to  notice 
of  time,  place,  and  purposes  of  such  meetings.  Where 
such  special  meetings  are  irregularly  assembled  on  call 
and  waiver,  they  are  usually  termed  " consent  meetings." 
By  unanimous  consent,  the  statutes  in  most  states 
authorize  such  meetings. 


250 


Organizing  a  Business 


FORM  17 

Notice  of  Annual  Meetings 

ABC  Mercantile  Company- 
Chicago,  Illinois 
Dear  Sir: 

You  are  hereby  notified  that  the  annual  meeting  of  the  stock- 
holders of  the  ABC  Mercantile  Company  will  be  held  at  the 

office  of  the  company, ,  Chicago,  Illinois,  on , 

19.  .,  at o'clock ,  for  the  election  of  directors 

for  the  ensuing  year  and  for  the  transaction  of  such  other  busi- 
ness as  may  come  before  the  meeting. 

The  stock  transfer  books  of  the  company  will  be  closed  at  the 

close  of  business  on ,  19 .  . ,  and  remain  closed  until  the 

opening  of  business  on ,  19.  .. 

Respectfully, 


,  19.  .  Secretary. 

This  form  of  notice  may  easily  be  modified  for  special 
stockholders'  meetings  and  for  the  regular  and  special 
directors '  meetings.  It  may  also  be  readily  adapted  for 
a  publication  notice. 

FORM  18 

Secretary's  List  of  Stockholders 

ABC  Mercantile  Company 
Chicago,  Illinois 

list  of  stockholders 
19.. 


Name 

Shares 
Owned 

Not 
Present 

Present 

in 
Person 

Present 

by 
Proxy 

Name  of  Proxy 

Forms  251 

Secretaries  will  find  this  a  convenient  form  in  which 
to  classify  the  information  necessary  to  determine  what 
stockholders  are  entitled  to  vote  at  the  meetings  of  the 
stockholders  and  by  what  authority  the  shares  are  to 
be  voted. 

FORM  19 

Ballot  for  Stockholders'  Meeting 

ABC  Mercantile  Company 

stockholders'  annual  meeting 

JANUARY  23,  1915 
BALLOT 

I  hereby  vote shares  for  the  following  persons 

for  Director,  votes  to  be  distributed  as  indicated. 

Votes 

Votes 

Votes 

Shares  as  owner 

Shares  as  holder  of  proxies. 

Note  :    Each  share  is  entitled  to  three  votes. 

(Signed)      

FORM  20 

Oath  of  Inspectors  of  Election 

State  of  Illinois,  County  of  Cook,  ss : 
We,  the  undersigned,  duly  appointed  to  act  as  inspectors  of 

election  at  the  annual  meeting  of  stockholders  of  the 

Company  to  be  held  in  the  office  of  the  company,  No 

Street,  in  the  city  of  Chicago,  on  the day  of , 

19.  .,  being  severally  sworn,  depose  and  say,  and  each  for  him- 
self deposes  and  says,  that  he  will  faithfully  execute  the  duties 
of  inspector  of  election  at  such  meeting  with  strict  impartiality 
and  according  to  the  best  of  his  ability. 

John  Doe. 
John  Smith. 


252  Organizing  a  Business 

Subscribed  and  severally  sworn  to  before  me  this   

day  of ,  19. .. 

Henry  White, 
(Notarial  Seal)  Notary  Public. 


FORM  21 

Inspectors'  Certificate  of  Election 

The  undersigned  inspectors  of  election,  duly  appointed  and 
qualified,  do  hereby  certify  that  at  the  regular  annual  meeting 

of  stockholders  of  the Company,  held  at  the  office 

of  said  company,  No Street,  Chicago,  on  the 

day  of  ,  19 .  . ,  a  quorum  being  present,  we,  after 

being  first  duly  sworn  by  oath  hereto  annexed,  did  conduct  the 
election  for  directors  of  said  corporation,  and  that  the  vote  taken 
thereat  resulted  in  the  election,  by  the  plurality  set  opposite 
their  respective  names,  of  the  following  directors  to.  serve  for  the 
ensuing  year. 

Names  Votes  Received 

John  Peterson 125 

William  Jones 108 

Carl  Nelson 117 

Witness  our  hands  this day  of ,  19 .  . . 

John  Doe, 
John  Smith. 

State  of  Illinois,  County  of  Cook,  ss : 

Before  me,  a  notary  public,  on  this day  of , 

19.  .,  personally  appeared  John  Doe  and  John  Smith,  to  me  well 
known  to  be  persons  described  in  and  who  executed  the  foregoing 
certificate,  and  severally  acknowledged  that  they  executed  the 
same  for  the  uses  and  purposes  therein  set  forth. 

Henry  White, 
(Notarial  Seal)  Notary  Public  for  County  of  Cook. 


Forms  253 

FORM  22 

Notice  of  Election  as  Director 

ABC  Mercantile  Company- 
Chicago,  Illinois 
Dear  Sir: 

You  are  hereby  notified  that  at  the  annual  meeting  of  the 

ABC  Mercantile  Company  held  on ,  19 . . ,  you  were 

elected  a  member  of  its  Board  of  Directors. 

The  next  regular  meeting  of  the  Board  will  be  held  in  the 

office  of  the  Company  ,   ,  at o'clock 

,  for  the  election  of  officers  and  for  the  transaction  of 

such  other  business  as  may  come  before  the  meeting. 

You  are  requested  to  be  present  and  take  part  in  that  meeting. 

Respectfully, 


Secretary. 
FORM  23 
A  Resignation 

TO  THE  BOARD  OF  DIRECTORS  OF  THE  ABC  MERCANTILE  COMPANY 

Gentlemen : 

On  account  of  removal  from  the  state,  I  hereby  resign  my 
position  as  a  Director  of  the  ABC  Mercantile  Company,  such 
resignation  to  be  effective  March  1,  1915. 

Respectfully, 


Chicago,  Illinois,  Jan.  30,  1915. 

FORM  24 

Proxy 

Know  all  men  by  these  presents,  That  I    ,  of 

,  in  the  state  of ,  a  stockholder  in  the 

Company,  do  hereby  appoint    ,   of 

,  in  the  state  of ,  to  be  my  attorney, 

agent,  and  proxy  with  power  of  substitution  to  vote  at  the ...    .  - 


254  Organizing  a  Business 

election  of  the Company  to  be  held  at  the 

office  of  said  corporation  at , ,  on  the 

day  of ,  19 .  . ,  and  at  any  and  all  adjourn- 
ments thereof  as  fully  as  I  might  or  could  were  I  personally 
present. 

In  witness  thereof,  I  have  hereunto  set  my  hand  and  seal 

this day  of ,  19. .. 

(Seal) 

Witness : 


This  proxy  may  be  modified  by  limiting  the  right  to 
vote  to  definite  propositions,  by  instructing  definitely 
upon  certain  propositions,  by  making  it  unlimited  as  to 
time  so  that  it  would  cease  only  by  a  specific  act  of  revo- 
cation, or  any  other  conditions  which  the  grantor  may 
wrish  to  include.  In  some  states  the  unlimited  proxy  is, 
however,  forbidden  by  law.  New  Jersey,  for  example, 
provides  that  "no  proxy  shall  be  voted  on  after  three 
years  from  its  date." 

FORM  25 

Dividend  Notice 
united  states  steel  corporation 

New  York,  September  29,  1914. 
On  July  28,  1914,  the  Directors  declared  a  dividend  of  1*4  per 
cent  on  the  common  stock,  for  the  quarter  ending  June  30,  1914, 
being  dividend  No.  43,  payable  this  day  to  stockholders  of  record 
September  1,  1914. 

In  accordance  with  permanent  order  on  file,  enclosed  please 
find  check  for  amount  due  as  above  on  the  common  stock  stand- 
ing in  your  name. 

No  acknowledgment  is  necessary. 

Please  notify  the  Stock  Transfer  Department,  71  Broadway, 
New  York,  of  any  change  in  your  address,  giving  your  old  address 
as  well  as  the  new.  Richard  Trimble, 

Treasurer. 


Forms  255 

FORM  26 

Certificate  op  Preferred  Stock 
7  per  cent  cumulative  preferred  stock 

number shares 

Incorporated  under  the  laws  of  the  state  of  New  Jersey 

UNITED  STATES  STEEL  CORPORATION 

This  is  to  certify  that is  the  owner  of 


full  paid  and  non-assessable  shares  of  the  par  value  of  one  hun- 
dred dollars  each,  in  the  PREFERRED  CAPITAL  STOCK  of 
United  States  Steel  Corporation,  transferable  only  in  person  or 
by  attorney  upon  the  books  of  said  Corporation,  upon  surrender 
of  this  certificate.  The  holders  of  the  preferred  stock  shall  be 
entitled  to  receive,  when  and  as  declared,  from  the  surplus  or  net 
profits  of  the  Corporation,  yearly  dividends  at  the  rate  of  seven 
per  centum  per  annum,  and  no  more,  payable  quarterly  on  dates 
to  be  fixed  by  the  by-laws.  The  dividends  on  the  preferred  stock 
shall  be  cumulative,  and  shall  be  payable  before  any  dividend  on 
the  common  stock  shall  be  paid  or  set  apart;  so  that,  if  in  any 
year  dividends  amounting  to  seven  per  cent  shall  not  have  been 
paid  thereon,  the  deficiency  shall  be  payable  before  any  divi- 
dends shall  be  paid  upon  or  set  apart  for  the  common  stock. 
Whenever  all  cumulative  dividends  on  the  preferred  stock  for 
all  previous  years  shall  have  been  declared  and  shall  have  become 
payable,  and  the  accrued  quarterly  installments  for  the  current 
year  shall  have  been  declared,  and  the  company  shall  have  paid 
such  cumulative  dividends  for  previous  years  and  such  accrued 
quarterly  installments,  or  shall  have  set  aside  from  its  surplus 
or  net  profits  a  sum  sufficient  for  the  payment  thereof,  the  Board 
of  Directors  may  declare  dividends  on  the  common  stock,  payable 
then  or  thereafter,  out  of  any  remaining  surplus  or  net  profits. 
In  the  event  of  any  liquidation  or  dissolution  or  winding  up 
(whether  voluntary  or  involuntary)  of  the  Corporation,  the 
holders  of  the  preferred  stock  shall  be  entitled  to  be  paid  in  full 
both  the  par  amount  of  their  shares  and  the  unpaid  dividends 
accrued  thereon,  before  any  amount  shall  be  paid  to  the  holders 


256  Organizing  a  Business 

of  the  common  stock;  and  after  the  payment  to  the  holders  of 
the  preferred  stock  of  its  par  value,  and  the  unpaid  accrued 
dividends  thereon,  the  remaining  assets  and  funds  shall  be  divided 
and  paid  to  the  holders  of  the  common  stock  according  to  their 
respective  shares.  The  preferred  stock  and  the  common  stock 
may  be  increased  as  provided  in  the  Certificate  of  Incorporation. 
This  certificate  is  not  valid  without  the  signatures  of  the  Transfer 
Agent  and  Registrar  of  Transfers.  WITNESS  the  signatures 
of  the  President,  or  of  a  Vice-President,  and  of  the  Treasurer 
or  of  an  Assistant  Treasurer,  of  said  Corporation. 


ass't  treasurer                                vice-president 
Registered : 

NEW  TORK  SECURITY  TRUST  CO.,  HUDSON  TRUST  CO., 

Registrar,  Transfer  Agent, 


By By 

SETARY 
SHARES  $100  EACH 


ASS'T  SECRETARY  ASS't  SECRETARY 


FORM  27 

Certificate  of  Common  Stock 

Incorporated  under  the  laws  of  the  state  of  Illinois 

ABC  Mercantile  Company 

Capital  Stock  $500,000 

Preferred  Stock  $250,000  Common  Stock  $250,000 

Par  Value  $100 

This  is  to  certify  that is  the  owner  of 

shares,  of  the  common  capital  stock  of  this  company,  full  paid 
and  non-assessable,  and  transferable  only  on  the  books  of  the 
company  by  the  holder  thereof,  in  person  or  by  duly  authorized 
attorney,  upon  surrender  of  this  certificate  properly  endorsed. 

The  rights  and  privileges  of  the  holders  of  preferred  and  com- 
mon stock  of  this  company  are  determined  by  certain  resolutions 


Forms  257 

printed  upon  the  back  hereof  which  are  a  part  and  parcel  of  this 
certificate  as  fully  as  if  incorporated  herein. 

Witness  the  seal  of  the  company  and  the  signatures  of  its 
President  and  Treasurer  this  day  of ,  19 .  . . 

(Seal)  President 

Treasurer 

The  above  form  of  common  stock  certificate  is  very 
simple  upon  its  face  and  by  means  of  the  printed  matter 
upon  the  back  of  the  certificate,  it  is  possible  to  give 
very  full  explanations  of  the  rights  of  different  stock- 
holders without  making  the  face  of  the  stock  certificate 
seem  unduly  heavy. 

FORM  28 
Stock  Certificate  Stub 


Certificate  number 

For shares 

Issued  to 


Dated ,  19 , 

Transferred  from 


Dated ,19.. 

Issued  against  original  certifi- 
cate number for 

shares. 

Received    certificate     number 

for shares 

this day  of  , 

19... 


258  Organizing  a  Business 

FORM  29 

Form  for  Assignment  of  Stock  on  the  Back  of  the  United 
States  Steel  Corporation  Preferred  Stock  Certificate 

For  value  received hereby  sell,  assign,  and  transfer 

unto    

shares 

of  the  Capital  Stock  represented  by  the  within  Certificate  and 

do  hereby  irrevocably  constitute  and  appoint 

Attorney 

to  transfer  the  said  stock  on  the  books  of  the  within  named  Cor- 
poration with  full  power  of  substitution  in  the  premises. 
Dated ,  19... 


In  Presence  of 


Notice  :  the  signature  to  this  assignment  must  correspond 
with  the  name  as  written  upon  the  face  of  the  certificate, 
in  every  particular,  without  alteration  or  enlargement,  or 
any  change  whatever. 

This  form  of  assignment  slightly  modified  may  be  used 
in  assigning  in  whole  or  in  part  any  other  contract,  right, 
or  property,  unless  expressly  prohibited  by  competent 
authority.  Stock  subscriptions,  installment  receipts,  and 
similar  documents  may  be  assigned. 

FORM  30 

Resolution  Declaring  a  Dividend 

Resolved,  That  the  sum  of  fifty  thousand  ($50,000)  dollars 
be  and  hereby  is  appropriated  and  set  aside  from  the  surplus 
profits  of  this  company  for  the  payment  of  a  two  (2)  per  cent 
quarterly  dividend  upon  its  outstanding  stock,  said  dividend  to 

be  due  and  payable  on  the day  of ,  19 . . ,  to 

stockholders  of  record  on  the  books  of  the  company  at  the  close 
of  business  on  the day  of ,  19 . . ,  and  that  the 


Forms  259 

Treasurer  of  this  company  be  hereby  authorized  and  instructed 
to  give  due  notice  of  such  dividend  and  to  pay  the  same  when  due. 

This  form  of  resolution  would  need  to  be  slightly  modi- 
fied in  case  both  preferred  and  common  stock  were  out- 
standing. Eesolutions  are  used  for  securing  action  upon 
all  the  more  important  matters  at  the  stockholders'  or 
directors'  meetings.  They  should  usually  be  submitted 
in  writing.  Less  formal  matters  are  disposed  of  by 
motion.  Motions  are  seldom  submitted  in  writing.  Stiil 
less  important  matters,  but  obviously  proper,  may  be 
disposed  of  by  simple  direction  of  the  president  and  in 
the  absence  of  objections  may  be  taken  as  the  action  of 
the  meeting. 

FORM  31 
Certification  of  Resolution 

The  undersigned,  Secretary  of  the  ABC  Mercantile  Com- 
pany, does  hereby  certify  that  the  foregoing  resolution  was  duly 

adopted  on  the day  of ,  19 .  . ,  at  a  regularly 

called  and  duly  constituted  meeting  of  the  Board  of  Directors 
of  said  company. 

Witness  my  hand  and  seal  of  said  corporation  this 

day  of ,19... 


(Corporate  Seal)  Secretary 

Certifications  are  frequently  required  in  corporate  pro- 
cedure. They  are  never  made  in  the  name  of  the  cor- 
poration, but  in  the  names  of  the  officers  directly  in- 
terested and  concerned.  The  foregoing  form  may  be 
modified  to  certify  to  other  transactions  of  the  company. 

FORM  32 

Reorganization  Certificate  5 

This  is  to  certify  that  Richard  Roe,  of  Chicago,  Illinois,  (here- 
inafter designated  as  the  transferer)   has  transferred  and  de- 
is  Frank 's  Science  of  Organization  and  Business  Development. 


260  Organizing  a  Business 

livered  to  William  Smith  (hereinafter  designated  as  the  trans- 
feree) Certificate  No.  23  for  1,000  shares  of  the  capital  stock  of 
the  Doe  Electrical  Mfg.  Co.,  for  the  purposes  and  upon  the 
conditions  following,  viz. : 

First,  that  the  transfer  above  named  is  made  to  enable  the  said 
transferee  to  effect  a  reorganization  of  the  said  company,  by 
reincorporating  the  same  under  the  laws  of  the  state  of  Illinois ; 
said  Illinois  corporation  to  be  known  by  the  same  or  similar 
name  as  the  present  organization,  and  to  have  a  capital  stock  of 
$125,000;  that  the  new  corporation,  when  formed,  shall  have 
$10,000  in  cash  paid  in  its  treasury,  after  all  obligations  of  the 
present  company  are  discharged ;  and  also  to  have  in  its  treasury 
$15,000 — face  value — of  its  capital  stock  for  sale,  at  par;  that 
said  corporation,  when  reorganized  by  said  transferee,  shall  pos- 
sess and  own  by  transfer  from  the  Board  of  Directors  of  the 
present  corporation  all  the  assets  thereof. 

Second,  that  the  said  transferee  agrees  to  deliver,  and  the  said 
transferer  agrees  to  receive,  in  lieu  of  said  stock  certificate,  a 
new  certificate  in  the  said  reorganized  company,  for  50  shares 
of  its  capital  stock  at  the  par  value  of  $10  per  share,  fully  paid 
and  non-assessable. 

Third,  it  is  further  understood  that  this  agreement  is  made, 
and  the  said  reorganization  is  contemplated,  for  the  purpose  of 
discharging  the  obligations  of  the  said  The  Doe  Electrical  Mfg. 
Co.,  and  to  preserve  its  assets  for  the  benefit  of  all  its  stock- 
holders, equally,  and  that  to  accomplish  said  objects  the  said 
transferee  is  hereby  vested  with  all  the  powers  and  rights  of 
ownership,  in  and  to  the  said  stock  so  transferred,  and  with  full 
power  to  consummate  said  reorganization  in  accordance  herewith. 

Fourth,  it  is  further  agreed  that  the  said  transferee  shall  per- 
fect said  reorganization,  as  soon  as  may  be  after  all  the  out- 
standing stock  in  the  present  corporation  is  transferred  and 
surrendered  under  the  terms  of  this  certificate ;  that  upon  his 
failure  or  inability  so  to  do,  within  a  reasonable  time,  he  shall 
redeliver  and  transfer  said  certificate  to  the  said  transferer. 

In  Testimony  Whereof,  the  said  parties  hereto  have  hereunto 


Forms  261 

set  their  hands  and  affixed  their  seals,  at  Chicago,  Illinois,  this 

fourth  day  of  May,  A.  D.,  1907. 

Richard  Roe  (Seal) 

William  Smith     (Seal) 

FORM  33 

Certificate  op  Dissolution 

certificate  of  dissolution  issued  by  secretary  of  state 

State  of  New  Jersey 

Department  of  State 

Certificate  of  Dissolution 

To  All  to  Whom  These  Presents  May  Come,  Greeting : 

Whereas,  It  appears  to  my  satisfaction  by  duly  authenticated 
record  of  the  proceedings  for  the  voluntary  dissolution  thereof 
by  the  unanimous  consent  of  all  the  stockholders,  deposited  in 

my  office,  that  the Company,  a  corporation  of  this 

state,  whose  principal  office  is  situated  at  No Street, 

in  the  city  of   ,  county  of  ,  state  of 

New  Jersey   ( being  the  agent  therein  and  in  charge 

thereof  upon  whom  process  may  be  served),  has  complied  with 
the  requirements  of  "An  Act  Concerning  Corporations  (Re- 
vision of  1896),"  preliminary  to  the  issuing  of  this 

certificate  of  dissolution 

Now,  therefore,   I,    Secretary  of  State  of  the 

state  of  New  Jersey,  do  hereby  certify  that  the  said  corporation 

did,  on  the day  of ,  19 .  . ,  file  in  my  office 

a  duly  executed  and  attested  consent  in  writing  to  the  dissolution 
of  said  corporation  executed  by  all  the  stockholders  thereof, 
which  said  consent,  and  the  record  of  the  proceedings  aforesaid 
are  now  on  file  in  my  said  office  as  provided  by  law. 

In  Testimony  Whereof,  I  have  hereto  set  my  hand  and  affixed 

my  official  seal  at  Trenton,  this day  of A.  D., 

19... 

(L.  S.)  Secretary  of  State. 


INDEX 


Accountancy,  modern,  the  double  task 
of,.  26. 

Accounting,  39. 

Accounting  department,  162. 

Accounts   "doctored,"    132. 

Act :  the  Clayton,  195  ;  the  Corporation 
Tax,  171  ;  the  Illinois  Corporation, 
138,  145  ;  the  Interstate  Commerce, 
124 ;  the  New  Jersey  Corporation, 
146;  the  Sherman  Anti-Trust,  -  182, 
193-95. 

Adams  Express  Company,  45. 

Administration,    city,    169. 

Advantages  of  ^corporations,   62.  • 

Advertisements!  70. 

Agreement  :»»of  co-partnership,  207; 
underwriting,    213* 

Agricultural  implements,  object  clause 
for'eharfer,v229. 

Alcoholic  beverages,.  29. 

Alien   corporation,    61.      ,  . 

Amendments:  of.  a  charter,.  116;  to 
thie  "bylaws,  •  110.      •   . 

American    courts,    138. 

American  Smelting  and  Refining  Com- 
pany,' 160. 

American  Sugar  Refining  Company, 
11,   124.  '  * 

Annual  meetings,  notice  of,  250. 

Anthracite  ooal,  191. 

Anti-Trust  Act,  the  Sherman',  193,  195. 

Anti-Trust  Law,  the  Sherman,  182.   '.   , 

Apartment  houses,  object  clause  *  in 
charter,   230.  r  '    ' 

Appeals,   the  Circuit   Court  of,  195. 

Arizona,   160  ;  corporation  law,   72- 

Articles :  of  association,  44  ;  of  'co- 
partnership, 36,  207  ;  of  incorpora- 
tion, 94. 

Assembly,   the   Illinois   General,   173. 

Assets :  dividends  out  of,  132 ;  Unfla- 
tion,    133 ;    right    to,    130. 

Assignment  of  stock,   form   for,   258. 

Association,  166 ;  articles  of.  44  ;  the 
Illinois    Manufacturers',    170. 

Auditing,  39. 

Auditor,   107. 

Australia,  charters  in,  71. 

Authority,   executive,   152. 

Automobiles,  object  clause  for  charter, 
229. 


Balances,  liability  for  unpaid,  130. 
Balance  sheet,   81-83,   125-26,   128-29. 
Ballot   for   stockholders'    meeting,    251. 


Baltimore  &  Ohio  Railroad  Company, 
180. 

Banking   houses,   69.        * 

Banks  :  as  corporations,  189  ;  national, 
189. 

Bessemer  steel,  27  ;  billets,  19. 

Beverages,    alcoholic,    29. 

Billets,  Bessemer  steel,  19.  v^ 

Bill  of  lading,  169.    ■     ♦ 

Blackstone,   47,   53. 

Board  of  directors,  44,  110;  record  of 
meetings,  88  ;  the  chairmaH  of,  105, 
149.  . 

Bondholder,  76. 

Bondholders,  115 ;  rights  and  obllga 
tions   of,    113. 

Bond  houses,  .69.  , 

Bonds,    76,  .113. 

Books   of   a   corporation,   87. 

Breach  of' trust,   liability  for,  147. 

Brokerage  hous*s,   69. 

Building  and  loan  associations,   189., 

Business  :  combinations,  165  ;.  corpora- 
tion, 59 ;  corporations,  classes  of, 
60  ;  *  management  defined,  3  ;  t  man- 
ager, function  of  the,  28 ;  methods 
of  conducting,  11  ;  morals,  24 ;  or- 
ganization, 1 ;  organization  affected 
by  industrial  conditions,-  26 ;  organi- 
zation affected  by  the  government, 
20 ;  organization,  political  condi- 
tions and,  20;  organizations,  .con- 
tracts of,-  21;  organization^,  rights 
of,  ,21;  organization,  things  prevent- 
ing' the  development  of,  27 ;  social 
and  industrial  conditions  affecting, 
23  ;   units.   8. 

By-laws,  97,  101,  116;  amendments 
to,  110;  of  the  U.  S.  Steel  Corpora- 
tion,  230. 

Calendar,  the  corporation,  91. 

California,   135., 

Call  :  and  wa4ver  of  notice,  248  ;  for 
special  meeting  of  stockholders,  249. 

Canals,   operated  by  corporations,   51. 

Capital  :  as  a  factor  of  wealth  pro- 
duction, 4,  7  ;  how  defined,  7  ;  rais- 
ing,  195  ;  working,   109. 

Capitalist,  the  socialists'  objection  to, 
13. 

Capitalistic  system,  the,  15. 

Capitalists,  co-operation  of,  with  la- 
borers,  26. 

Capitalization,  75. 


263 


18 


Index 


Opitfll   stock,  07. 

••Cartel,"  attUugv  pi  the  German 
Government   toward,   22, 

Can- :  Dartmouth  College,  47 ;  Lller- 
mun  vs.  the  Chicago  Junction  Rail 
WHjs,  Ji>»  i  the  Chattanooga  Rate, 
10(7;   Western   FrelgM   »ate,   109, 

Cash  iivldendu,   128, 

Centralised   administration,    U0. 

Central  West.   17J.,  ,      .M 

Certificate:  of  cotumoi  stock,  290;  pi 
dissolution.  201 ;  oi'  election,  inspoe- 
txft$',  858  :  of  incorporation,  04,  ^"13  ; 
of  preferred  stock,  255* !  of  stack, 
101  ;  reorganisation.  859;  stock,  50, 
104  ;   nrock,   the  stub  of,  257. 

'.VitiMogtea,    trust.    178. 

Certlikmlon    of    resolution,    259. 

Chairman  of   the   board,   105,    149. 

Chamber  o£  Commerce,  tbe  Cham- 
paign,  J67    108. 

Chambers  of  ooinmoroo.    167. 

Cbampulgn  Chawuor  of  Commerce. 
107,   108. 

Champaign,    Hi.,   107. 

Chart,  organisation,  163. 

Charter,  04,  101,  11Q ;  amendments, 
97  ;  duration  of  a  corporation's,  In 
soma  Ktatos,  59  :  of  tb»  U,  8.  flr%)] 
Corporation,  2 17  ;  procoss  of  taking 
out,   78. 

Charters.  00 ;  federal  and  state,  71 ; 
where   taken   out,   71. 

Chattauooga  Rate  case,  109. 

Chemical  Company,  object  elsi*c  in 
charter.   229. 

Chicago.  98:  Junction  Railways,  the 
ease  of  EUerinun  vs.,  130;  Railways 
Company,  78. 

Chief:  counsel,  104,  107;  Justice 
White,    193. 

Choice  of  a  state  for  incdrpo ration, 
70. 

Church.  59. 

Chuirches,   61. 

Circuit    Court  of  Appeal*),   195. 

City :  administration,  169 ;  vs.  tbe 
country,    24. 

Civilization,    progress   of,   7. 

Classes  :  of  business  corporations.  On  : 
of  corporations,  57 ;  of  organiza- 
tions,  28, 

Classification  :  Official.  Territory,  171  ; 
of  industries,  17. 

Clause*,   object,   228. 

Clayton  Act,  195. 

Climate,  a  temp, -rate,  best  adapted  to 
tbe  development  of  onargy  and  en- 
terprise, 6. 

Climatic  conditions  adapted  to  certain 
kinds  of  manufacturing,  5. 

Clothing,    men's,    where   made,   18. 

Club,  50. 

Clubs,   commercial,  J67. 

Coal:  and  trade  centers,  0;  anthra- 
cite,   101  ;    freight   rates  on,    173. 

Code,    r'ie   New   Jersey,   106. 

Colorado.    100. 

Combination.  173;  attitude  af  U.  S. 
Government  toward,  22 ;  of  land, 
labor,    and    capital,    8. 

Combinations:  business,  185;  classes 
of,    175;    geographical,    176;    "limit- 


ing." 175;  price,  173;  production, 
175-70;  profit-sharing,  170;  purposes 
of,  174;  reasons  for,  165;  "shar- 
ing," 175;  tbe  law  in  the  t,  8.  as 
to,  177.   180, 

Commerce,  19 ;  chambers  of,  ioj  ; 
Commission,  the  Interstate,  172 ; 
Law,  the  Interstate,  124  j  the  Cham- 
paign  Chamber  of,    167,   10S. 

Commercial   clubs,   107. 

Commission :   tariff,   169 ;   the   Federal 
Trade.     195;     tbe     Interstate    Com 
mcroe,   124. 

Committee :  an  executive,  149  ;  execu- 
tive, 152;  tbe  N.  Y.  Legislative 
Insurance   Investigating,   156. 

Commute*).  10s !  kinds  of,  169, 

Common :  law.  contracts  under,  103 ; 
atock.   certificate   of,   856, 

Communism,  11, 

Community  of  interests.  184. 

Companies:  holding,  120;  joint  sfcook, 
44  ;  mutual  life  insurance,  61, 

Company,  the  leasing,  166. 

Competition,   30. 

Competitive  syst,em  protected  by  gov- 
ernments,  21.- 

Comptroller,    149. 

Concrete,   reinforced,  27.. 

Conditions  of  success,  42. 

Congress,    68,    171,    193,    195. 

Connecticut,  corporation  laws,  72. 

Continued  existence  of  corporations, 
52. 

Contract :  promoter's,  211 ;  to  form  a 
corporation,   a09. 

Contractors  and  builders,  object  clause 
in   charter,    230. 

Contracts,  104 ;  of  busino»s  organiza- 
tions, how  treated  \ff  government, 
21. 

Co-operation,  14  ;  of  capital  and  labor, 
20. 

Co-operative :  Society,  the,  14 ;  spirit 
the    outgrown    of    experience,    25. 

Coopers'  Co-operative  Societies  of 
Minneapolis,  15. 

Co-partnership  :    articles  of,  30,  207. 

Corporate:  form  of  organization,  22; 
management,  forms  used  iu,  207; 
officers,  148. 

Corporation,  28,  47  :  Act,  the  Illinois, 
138,  145 ;  a  dominant  factor  In 
mode  rn  business  enterprise,  24 ; 
among  the  Romans.  24 ;  balance 
sheet,  81-83;  business,  59;  calendar, 
'•H  ;  contract  to  form  a,  209 ;  con- 
trasted with  partnership,  132-2S ; 
credit  of  a.  65 ;  Federal,  Tax  Law, 
63  ;  formation.  68  ;  law,  103 ;  man- 
agement of,  56  ;  municipal,  58  ;  offi- 
cers and  directors  of,  138;  Tax  Act. 
tbe  Federal,  171  ;  Tax  Law,  171 ;  ter- 
mination of  life,  54;  tbe  books  of. 
87;  tbedlssolutionof.110;  the  hold- 
ing, 166.  180;  the  name  of,  05;  the 
object  of.  05  ;  the  U.  8.  Steel,  9, 
98-97,  103.  105,  162;  the  U.  S.  Steel. 
charter  of.   217. 

Corporations:  advantages  of.  02;  and 
business  morals,  24  ;  and  credit,  52  ; 
banks  as.  189;  classes  cf,  57,  00, 
61  ;  disadvantages  of,  63  ;  eleemosy- 


Index 


2G5 


nary,  59;  four  characteristics  of, 
50:  method  of  chartering,  48;  sub- 
sidiary. 178;  the  New  Jersey  stat- 
ute  on,    139. 

Counsel ;  chief,  104,  107  ;  general,  107, 
149. 

Country    vs.    the    city,    24. 

Court   of  Appeals,   the   Circuit,   195. 

Courts  in  the  U.  S.,  1G4. 

Creature  of  the  state,  the  corporation 
Is  a,  48. 

Credit  of  a  corporation,   05. 

Creditor* :  rights  and  obligations  ofc 
113;    rights    of,    18ft 

Cumulative  voting.  122. 

"Cutting  a  melon,"  120. 

Dartmouth  College  case,  47.  98. 

Bebts.   110. 
ecislons    of    the    Supreme    Court    In 
New  York  and  Ohio,   180. 

Deeds,   104. 

Delaware,   corporation   laws  of,   73. 

Denver,    180. 

Departments,    152. 

Department  store,  object  clause  for 
charter,   228. 

Differentials,    port,    109. 

Director,   notice  of  election  as,   253. 

Directors.  99,  103.  110.  117.  129.  138, 
143:  and  vacancies.  144;  as  man- 
agers, 138 ;  board  of.  44  ;  duties  of, 
defined  by  court3.  138 ;  liabilities  of, 
144,  146;  the  dividend  policy  of, 
140;  three  important  functions  of, 
140. 

Disadvantages  of  corporations,  63. 

Discussion,   right  to,   119. 

Dissolution :  certificate  of.  261 ;  of 
corporation.  116 ;  of  partnership, 
208 ;   of  partnerships,   41. 

Dividend :  notice,  254  ;  policy  of  di- 
rectors, 140 ;  resolution  declaring, 
258. 

Dividends,  108 ;  cash,  128 ;  liability 
for  illegal,  145:  out  of  assets,  132; 
rights  as  to,  125  ;  right  to  declare, 
120;  stock,  12G. 

"Doctored"  accounts,  132. 

Dodd  and   trusts,   178. 

Domestic   corporation,   61. 

Dupont  Powder  Company,  182. 

Duties:  and  liabilities  of  officers,  149; 
of  partners,  40. 

Earnings,  the  use  of  surplus,  125. 
East  Coast  Railway,  the  Florida,   106. 
Election :   as   director,    notice   of,   253 : 

inspectors"   certificate   of,   252;   oath 

of  inspectors  of,  251. 
Electricity,    191. 
Ellerman,    the    case    of,    vs.    Chicago 

Junction   Railways,   139. 
Eminent  domain.   21. 
Employers'  liability,   173. 
Employes,  management  of,  40. 
mglanfl  :  charters  in.  70;  corporations 

in.  50, 
English:    and    American    courts.   JL38 ; 

common  taw,  contracts  under.  193. 
Enterprise,  financing  the.  69. 


Enterpriser,  the  :  as  a  factor  of  wealth 
production,  4,  8:  function  of  the. 
8.   28. 

Entity,    the   corporate,   47. 

"Entrepreneur,"    the,    16. 

European    War.    172. 

Executive  :  authority,  132  ;  committee, 
149.  152;  committee  syBtem,  lfiB ; 
function,  182:  relationship  of,  to 
operation.  100;  the,  152-53;  the 
functions  of,  157  ;  the  single  vs.  the 
plural,  154. 

Existence,  continued,  of  corporations, 
52. 

Express:  Company,  Adams,  45 ;  rates, 
1G9. 

Extractive  Industries,  18. 

Factory   inspection,   173, 
Farmers,  difficulty  of  uniting,  25. 
Farming,  an  extractive  industry,  18. 
Federal :      charter.      71 ;      Corporation 
Tax,    63,    1T1  ;    Trade    Commission, 

Fees   charged  for  Incorporating   72. 
Finance,   dividends   and,    10S. 
Financing   the    enterprise,    69. 
Firm  name,   37. 

First  meeting  of  stockholders.  248. 
Flsh-Harrinian   contest.   121. 
Fishing  an  extractive  industry.  18. 
Fittest,  law  of  the  survival  of,  81. 
Flagler.    Henry    M\,    106. 
Florida  Enst  Coast  Railway,   198. 
Foreign  trade,  efforts  to  secure.  172. 
Formation   of   the   corporation,   68. 
Forms  used  in  corporate  management 
20i. 

France,  charters  in,  70. 

Franchises,    60. 

Freight:     Rate    cases,    Western,    loo ; 

rates.  171 1  rates  on  foal,  173. 
Fucgers,    the,    100. 
Full  paid  stock,  85. 
Functional    organization-.    101. 
Functions :  of  the  executive,  152.  157 ; 

of  directors,  140. 

Gas.  191  j  and  location  of  industries.  6. 

General  manager,   104,  108.   152. 

German  Government,  attitude  of.  to- 
ward the  "cartel,"  22. 

Governments :  authorize  various  or- 
ganizations, 20;  engage  in  business, 
20:  protect  competitive  svstemp,  21  : 
regulate  transportation.  23 ;  repress 
monopolies.    21, 

Great  Northern :  Company,  184 ;  ore 
properties,  77:  Railway,  the,  114. 

Green,    Vice-chancellor,    139. 

Groups,  Industrial,  17. 

Harbors.    109. 

Harvey  Flak  &  Sons.  69. 

Highways,    public.    173. 

Holding  :  companies.   120  ;  corporation, 

the.   180.    180. 
Hospital,    50. 
Hotel     company,     object     clause     for 

chatter,  280. 


266 


Index 


Illegal   dividends,  liability   for,   145. 

Illinois.  171  :  Central  Railroad,  121  ; 
Corporation  Act.  13S.  115:  cumula- 
tive voting  In.  ]"'-!:  freight  rates  on 
coal  in,  173;  Manufacturers'  Asso- 
ciation. 170;  method  of  taking  out 
a   charter,   74. 

Incorporation  :  articles  of,  04 ;  cer- 
tificate of,  04.  215  ;  charter  of,  04  ; 
fees,  71' ;  states  most  favorable  to, 
73. 

Incorporators,  08. 

Indiana.  135 ;  freight  rates  on  coal 
in,    173. 

Individual  :  partners,  powers  of,  30 ; 
proprietor,  advantages  and  disad- 
vantages of,  20,  30;  proprietorship, 
28-20,  55 ;  proprietorship,  adapta- 
tions  of,  32. 

Individualism,    extreme,    16. 

Industrial  :  conditions  affecting  busi- 
ness, 23 ;  conditions  affecting  busi- 
ness organization,  26  ;  groups,  17  ; 
monopolies,  191. 

Industries  :  classification  of,  17  ;  man- 
ufacturing   statistics,    66. 

Inflating    assets,    133. 

Information,    the   right   to,    122. 

Inspection,  factory,   173. 

Inspectors  of  election :  certificate  of, 
252 ;    oath   of,    251. 

Installment :  notice  for  subscriptions 
payable  on  demand,   247  ;  scrip,  247. 

Insurance :  companies,  mutual  life,  61 ; 
investigations,    156. 

Interests,  community  of,  184. 

International  Harvester  Company, 
the,   11. 

Interstate  Commerce :  Commission, 
172  ;    Law,    124. 

Inventions,    27. 

Investments    of    partners,    38. 

Investors,   the   risk   to   individual,   197. 

Issued   and    unissued   stock,    84. 

Jersey  City,  98. 

Joint  stock   companies,  44. 

Kidder,  Peabody  &  Co.,  69. 
Kuhn,  Loeb  &  Co.,  69. 

Labor ;  and  capital,  26 ;  as  a  factor  of 
wealth   production,   4,    6. 

Land  :  as  a  factor  of  wealth  produc- 
tion, 4  ;  rent-producing,  socialists 
seek  abolition  of,  13. 

Law :  corporation,  103 ;  English  com- 
mon, 103  ;  New  Jersey  Corporation, 
130 :  of  the  survival  of  the  fittest, 
31  ;  the  Corporation  Tax,  171  ;  the 
Interstate  Commerce,  124;  the  New 
Jersey,  105;  the  Sherman  Anti- 
Trust,    182. 

Laws,   liability  for  violating,   146. 

Leases,    means   of   development,   45. 

Leasing   company,    166,    183. 

Lee,    Higginson   &  Co.,   09. 

Legal  :  department.  162  ;  entity  of  the 
corporation,   47. 

Legality  of  organization,  188. 

Legislation,   hazardous  machinery,  173. 

Legislatures,   134. 


Liabilities:  duties  and,  of  officers,  149; 
of  directors,  144 ;  of  stockholders, 
130  ;     special.     135. 

Liability:  for  breach  of  trust,  147; 
for  illegal  dividends,  145  ;  for  stock 
issues,  146 ;  for  unpaid  balances, 
130;  for  violating  laws,  146;  lim- 
ited. 50,  100  ;  measure,  employers', 
17.'!;  of  a  stockholder  summarized, 
135. 

License,  29. 

Life  insurance,   co-operation  in,   15. 

Limited    liability,    50,    109. 

"Limiting"    combinations,    175. 

List  of  stockholders,  the  secretary's, 
250. 

Loan   associations,   building  and,   189. 

Locomotive,   27. 

Lodges,    (il. 

Lottery,    29. 

Lumbering  an   extractive   industry,   18. 

Mail,   transportation   of,   29. 

Maine,    corporation    laws,    72. 

Man,  an  element   in  the  production  of 

wealth,  6. 
Management :    defined,    3 ;    the   relation 

of   organization    to,    3. 
Manager :    business,    function    of    the, 

28  ;   general,   104,   108.   152. 
Managerial   class,   the,   15. 
Managers,    the   directors  as,   138. 
Managing  partner,   152,   154. 
Manipulations,    142. 
Manufacturers'     Association,     the     Illi- 
nois,   170. 
Manufacturing,  18  ;  conditions  adapted 
to,    5 ;    department,    162  ;    industries, 
statistics  of,  66;  organizations,  170; 
requirements  for  certain  kinds  of,  5. 
Marshall,   Chief   Justice,    47. 
Maryland.    180. 
Massachusetts,    51,    52. 
Meeting:  ballot  for  stockholders',  251; 
of   stockholders,    president's   call    for 
special,     240 ;     of    stockholders,     the 
first,   248. 
Meetings :    notice    of    annual,    250 ;    of 
stockholders,   88  ;   record  of,  88  ;   the 
voting    at    stockholders',    121. 
"Melon,"   "cutting  a,"   126. 
Merchants'    Association    of    New    York 

City,  167-60. 
Merger,    166,    184. 

Methods  of  conducting  business,   11. 
Mexico,   160. 
Mexico   City,   160. 
Mining :    an    extractive    industry,    IS ; 

partnerships.  45. 
Minneapolis,   Co-operative   Societies   of.. 

15. 
Minnesota,    135. 
Money  exchange.   25. 
Monopolies.    180 ;    Industrial,    194 ;    re- 
pressed  by   governments,   21. 
Monopolistic  holding  corporations,  ll2. 
Morgan,   J.    P..   &   Co.,   69,    196. 
Mortgage   bond    issue,    114. 
Municipal  corporation,   58. 
Mutual  life  insurance  companies,  61. 

Name :    of    corporation.    95  ;    of    part- 
nership, 37. 


Index 


267 


National  banks,   189. 

Nevada,  incorporation   laws,   73. 

New   England   farm   life,   25. 

New  Hampshire,  corporation  laws,  72  ; 
Dartmouth  College  case,  98. 

New  Jersey,  98,  109,  111,- 180;  cor- 
poration laws,  72,  105,  106.  130, 
132,  139,  146;  method  of  taking  out 
a  charter  in,  74. 

New    Mexico,    160. 

New  York.  51,  135,  169 ;  City.  167 ; 
corporation  laws,  72  ;  Insurance  In- 
vestigating Committee,  156  ;  Stock 
Exchange,    86. 

Non-assessable    stock,    85. 

North    Dakota,    135. 

Northern :  Pacific,  184 ;  Railway,  the 
Great,  114 ;  Securities  Company, 
182,   184. 

Notice :  of  annual  meetings,  250 ;  of 
election  as  director,  253 ;  right  of, 
118. 

Oath  of  inspectors  of  election,  251. 

Object  clauses,  228. 

Obligations  of  bondholders  and  others, 
113. 

Officers :  and  directors  of  a  corpora- 
tion, 138 ;  duties  and  liabilities  of, 
149  ;   the  corporate,    104,   148. 

Official   Classification   Territory,   171. 

Ohio,  the  decisions  of  the  Supreme 
Court  in,  180. 

Oil  :  Association,  Pierce-Fordyce.  45  ; 
Company,  the  Standard,  124,  182 ; 
decision,  the  Standard.  193 ;  Trust, 
the  Standard,  179,  184. 

Operating ;  organization,  151  ;  units 
defined,  9  ;   units,   how   controlled,  9. 

Operation,  organization  for,  151  ;  the 
executive's    relationship    to,    160. 

Ore   and    coal   department,    162. 

Ores,   160,  161. 

Organization  :  affected  by  industrial 
conditions,  26 ;  chart,  163 ;  corpo- 
rate form  of,  22  ;  for  operation,  151  ; 
functional,  161;  legality  of,  188; 
permanence  of  the,  202 ;  tests  of 
efficient,  187  ;  the  general  principles 
of,  151  ;  the  relation  of,  to  manage- 
ment, 3 ;  things  preventing  the  de- 
velopment of,  27  ;  trust  form  of,  22  ; 
various   types   of,   2. 

Organizations :  classes  of,  28 ;  trade 
and  manufacturing,  170. 

Organizing-  a   business,    1. 

Output,   effect  of  limiting,    176. 

Pacific  Railway  Company  :  the  Union, 
182;  the  Northern,   184. 

Partner  :  managing,  152  ;  withdrawal 
of,   42. 

Partners,  37 ;  financial  arrangements 
of,  38 ;  investment  of,  38 ;  powers 
of  Individual,  39  ;  rights  and  duties 
of,  40. 

Partnership,  28.  34,  43.  55  :  contrasted 
with  corporation,  122,  123  ;  dissolu- 
tion of,  208 ;  limitations  of,  48 ; 
plural  executive,  154 ;  purposes  of, 
37. 

Partnerships,  changes  in,  51  ;  dissolu- 
tion of,  41 ;  general  and  special,  35  ; 


limited,  36;  mining,  45;  ordinary, 
36. 

Partner's  withdrawal,  notice  of  a, 
209. 

Passenger  rates.    169. 

Pennsylvania,  135  ;  Railroad  Company, 
180. 

Petroleum   industry,   184. 

Pierce-Fordvce   Oil   Association,   45. 

Pittsburg.    98,    180. 

Policy,   dividend,    of   directors,    140. 

Political    conditions,    20. 

Tools.   175. 

Port   differentials.    169. 

Powder  Company,  the  Dupont,  182. 

Power   loom,   27. 

Powers   of   Individual    partners.    39. 

Preferred  stock,  78 ;  certificate  of, 
255  ;  of  the  U.  S.  Steel  Corporation, 
form   for  assignment  of.   258. 

President.  104,  110,  149,  152;  for- 
merly the  executive,   154. 

President's  call  for  special  meeting  of 
stockholders,    249. 

Principles,  the  general,  of  organiza- 
tion,  151. 

Private :  corporations,  how  classed, 
61  :   property  and   socialists,   13. 

Profits,  how  determined  in  partner- 
ships.  39. 

rrofit-sharing  co-operative  organiza- 
tions.  24. 

Progress  of  civilization,  how  described, 
7. 

Promoter,   69. 

Promoters,    statements    by,    70. 

Promoter's   contract,    211. 

Promotion,   68. 

Proprietor:  his  own  executive,  154; 
individual,  advantages  and  disad- 
vantages   of.    29,    30. 

Proprietors,  relationship  of  the  exec- 
utive to,   158. 

Proprietorship.  151  ;  individual.  28, 
29,  55 ;  individual,  adaptations  of, 
32  ;  responsibility  to,   155. 

Prospectuses,    70. 

Proxv,  form  of,  253 ;  limitations  of, 
254 ;    right   to,    119. 

Public  :  highways,   173  ;  utilities,  191. 

Purchasing  department,  162. 

Pure  food  law,   22. 

Railroads :    income    of,    171 ;    operated 

by  corporations,  51. 
Railroad   terminals.    173. 
Railway :    monopoly.    191  ;    the    Great 

Northern,    114 ;    tracks,    steam,    the 

removal  of,   169  :  traffic  regulated  by 

governments,   23. 
Railways :    Company,    Chicago.    78 ;    in 

the  U.   S..   statistics  of.   124. 
Rate  case,  the  Chattanooga.   169. 
Rates :     express,     169 ;     freight,     171 ; 

passenger,    169. 
Receiver,  the  appointment  of  a,  115. 
Receivership,   115. 
Registrars,    86. 

Reorganization    certificate,    259. 
Report,   annual,   105. 
Reserve,   109. 
Resignation,   form   of,   253. 


2G8 


Index 


Resolution :    certification    of,    259 ;    de- 

clnrtn?  a   dividend,   258. 
Resolutions,    111. 

gesources,  proper  ase  of,  5. 
esnonslbility    to    the    proprietorship, 
153. 

Restraint  of  trade,  103. 

Right:  of  notice.  118;  to  assets,  180  i 
to  declare  dividends.  129;  to  dis- 
cussion, 119  ;  to  information,  122  ; 
to  proxy.  119. 

Rights  :  as  to  dividends.  125  ;  of  bond- 
holders and  others.  113  :  of  business 
organisations  protected  by  govern- 
ments. 21 ;  of  creditors,  136 ;  of 
partners.  40 ;  of  stockholders  nB  a 
body,  110:  of  stockholders  as  indi- 
viduals,  118. 

Risk-takers,  classification  of,   109. 

Risk  to  individual  investors.   197. 

Rivers  and  trade  centers,  8. 

Rock  Island   Company,    122. 

Ropers.  Henry  H.,  196. 

Romans :  corporation  features  among, 
24  ;  their  view  of  limited  liability, 
50. 

Sales  department,  162. 

Schiff,  Jacob  H.,  statement  of,  156. 

Scrip,   installment.   247. 

Secretary,   104.   105.   107.  110.   149. 

Secretary's  list  of  stockholders.  250. 

Securities :  Company,  the  Northern, 
182.  184  ;  how  disposed  of.  80. 

Shareholders,    special   powers   of.    122. 

Shares :  Joint  stock  company.  44 ;  of 
stock.  77 :  transferable.  54. 

Sherman  Anti-Trust  Act,  182.  198-95. 

Shipbuilding   Co..   the   U.    8.,   98. 

Single  executive,   154. 

Smelting  and  Refining  Company,  the 
American.  100. 

Social ;  conditions  affecting  business, 
23;  corporations,  59. 

goclallsm.  18. 

Societies.  Coopers'  Co-operative,  of 
Minneapolis.    IPS. 

South  Dakota.   135  : 
73. 

Special :  liabilities.  135 ;  meeting  of 
stockholders,  the  president's  call 
for.    249. 

Speyer  &  Co..  69. 

Spinning-Jenny.   27. 

Standard  Oil:  Cnmpanv.  124.  182;  de- 
cision, the,  193;   trust.   17S-70,   184. 

State :  charter.  7i  ;  choice  of  a.  70 ; 
the  corporation  a  creature  of  the, 
48. 

Stntes  most  favorable  to  incorpora- 
tion.  78. 

Statistics  of  railways  In  the  U.  S., 
124. 

Steam-engine.    27. 

Sf-oel  :  Bessemer.  27  :  billets.  Bessemer, 
in  ;  Corporation,  charter  of  the  TJ. 
S..  217;  Corporation,  the  U.  8.,  96- 
97.  103.  105.  162;  Corporation,  the 
tJ.  S..  by-laws  of,  230 ;  Corporation, 
the  U.  8.,  form  for  assignment  of 
preferred  stock  of,  258. 

Stock.  77.  101  :  certificate.  59  :  certifi- 
cates, 104  ;  certificates  of,  101 ;  cer- 


corporatlon  laws, 


tiflcate  stub,  257 ;  common,  77 
companies,  joint,  44 ;  corporations 
01  :  dividend,  declaring  a.  126  ;  divi 
rlends,  126 ;  Exchange,  New  York 
S6  :  exchanges,  69  :  form  for  assign 
ment  of.  258 ;  full  paid  and  non 
assessable.  85  ;  Issued  and  unissued 
84;  Issues,  liability  for,  148;  pre 
ferred.  78 ;  the  capital,  97 ;  treas 
ury,   84. 

Stockholders.  102,  143;  first  meeting 
of.  248:  liabilities  of.  130,  184-35; 
president's  call  for  special  meotlng 
of,  249 :  rights  and  obligations  of, 
113;  rights  of,  as  a  body,  116 ; 
rights  or,  as  individuals,  118 ;  spe- 
cial powers  of,  122 ;  the  secretary's 
list  of.   250. 

Stockholders'  meeting,   ballot  for,  251. 

Stockholders'  meetings,  the  voting  at, 
121. 

Streets  of  the  city,  169. 

Stub  of  stock  certificate,  257. 

Subscription  :  blank,  246 :  list,  245. 

Subscriptions  payable  on  demand,  in 
installment  notice   for,    247. 

Subsidiaries,   the  control  of.   181. 

Subsidiary   corporations.    178. 

Success,  conditions  of.  42. 

Sncar  Refining  Company,  the  Ameri- 
can,   124. 

Supreme  Court,  98.  184.  193:  of  the 
U.  S.,  182  :  the  decisions  of,  In  New 
York   and   Ohio,   180. 

Surplus    earnings,    use   of,    125. 

Survival  of  the  fittest,  the  law  of,  31. 

Syndicates.    35 ;    underwriting,    89. 

Tariff  Commission,  the  establishment 
of   a   permanent.    109. 

Tax :  Act.  the  Federal  Corporation, 
171 ;  Law,  the  Federal  Corporation. 
63.    171. 

Telegraph.  27,  191. 

Telephone.   27,  191. 

Temperature,  Important  In  the  produc- 
tion  of  wealth.  6. 

Tennessee.   185. 

Terminals,   railroads,   173. 

Tests   of   efficient  organization,   187. 

Texas.   160. 

Tracks,  steam  railway,  the  removal 
of.  169. 

Trade  :  Commission,  the  Federal.  195  : 
foreign,  172:  organizations,  170;  re- 
straint of.   193. 

Traffic    department,    162. 

Transferable    shares.    54. 

Transfer   agents,    86. 

Transportation.  19:  of  mall.  29;  reg- 
ulated   by    governments,    28. 

Treasurer.    104,   106,    107,   149. 

Treasury    stock.    84. 

Trust,  106:  certificates,  178;  com- 
pany, 86:  form,  advantages  of.  17S  : 
form  of  organization,  22 :  llabilltv 
for  breach  of.  147 ;  the  Standard 
Oil,    179.    184. 

Trusts,  165.   178. 

Underwriting:   agreement,   213;  syndi- 
cate, 69. 
Union   raelflc  Railway  Company,  182. 


Index 


269 


United  States,  189;  disadvantages  of 
combinations  in,  177  ;  tirst  corpora- 
tions created  In,  5]  ;  Government, 
attitude  of,  toward  combination,  22  ; 
Shipbuilding  Company,  98 ;  Stotl 
Corporation,  00-97,  103,  105,  1«2 ; 
Steel  Corporation,  a  type  of  business 
unit,  9;  Steel  Corporation,  charter 
of,  217;  Steel  Corporation's  pre- 
ferred stock,  form  for  assignment  of, 
258 ;  Steel  Corporation,  the  by- 
laws of,  230;  the  law  In,  as  to  com- 
binations, 189 ;  the  Supreme  Court 
of  the.  182  ;  the  trust  in,  178. 

Units,  business,  various  types  of.  8. 

University,   59. 

Unpaid  balances,   liability  for.  130. 

Utilities,    public,    191. 

Vacancies.   144. 
Vice-chancellor  Green,  139. 


Vice-president,   104,   108.   149. 

Violating  laws,   liability   for,    146, 

Virginian    Hallway,    IGtl. 

Voting;  at  stockholders'  meetings, 
121;  cumulative,  122;  stock  of  cor- 
porations,   178, 

War.    the    Europcau,    172, 
Washington.  171 ;  Branch  Road.  180. 
Water.    101. 
Waterways.    169. 

Wealth  production,  factors  of,  4. 
West,   the  Central.   171. 
Western  Freight  Kute  cases.   169. 
White,  Chief  Justice.  103. 
Withdrawal :   of  a   partner.   42 ;   part- 
ner's, notice  of.  209, 
Working  capital,  109. 

Tale  Review,  65. 


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